Turkey: Currency crisis still unfolding – TDS

Analysts at TD Securities note that the currency crisis in Turkey is still unfolding as USDTRY moved another 7% higher since Friday close as the government and the CBRT have failed to acknowledge the seriousness of the situation, and provide markets with a proper and timely response (USDTRY is up 30% in three days).

Key Quotes

“In an attempt to minimize the impact of the lira slide on local banks, the CBRT announced measures on FX reserves and financial markets earlier today. However, the impact is limited so far as much more drastic measures are required to stabilize the lira, before its plunge turns into a much bigger problem for macro-financial stability in Turkey. Moreover, some of the announced measures may help in the short run, but will lead to faster FX reserve depletion going forward.”

“We continue to think that aggressive rate hikes to around 30% are necessary to support TRY. In the absence of realistically effective measures, we are likely to continue seeing the Turkey crisis spill over into other markets, starting with the high beta EMs such as South Africa, Russia, Brazil and Mexico. Fixing the Turkey crisis, however, also means helping these other markets recover at least some of then recent weakness.”