Turkish social unrest and rising US yields are not a good combination for the currency, JP Morgan’s Sara Yates says
Sara Yates, vice president – global FX strategist at JP Morgan Private Bank, comments on the effects of Turkish political turmoil on global markets.
“We have not favoured holding the TRY because of the central bank’s determination to keep the real effective rate below 1.20. Real effective exchange rates appreciate if the currency appreciates and/or inflation rises. As Turkey has high inflation relative to its trading partners, it implies the exchange rate has to depreciate to keep the currency stable in real terms. Consequently, we have not been surprised by the aggressive rate cuts or the underperformance of the currency as the central bank has tried to push the real rate lower.
“However, the recent moves in the TRY were driven by other factors. Initially, the sell off was driven by a general USD move which caused all EM FX to come under pressure. Last week, increased geopolitical tensions also weighed on the currency at the start of the week. Friday, however, ended on a more upbeat note. First the unspectacular NFP print gave the market no additional reason to fret over early tapering (and retreat from EM FX). Second, late headlines on Friday suggested the Prime Minister (Erdogan) was ready to ‘listen to the demands of anti-government protesters’.
“Absent of US data surprises and a re-escalation of Turkish domestic tension, the recovery in the TRY could have legs in the near term. However, there are a lot of ‘ifs’ in this sentence. Longer term, rising US yields are a challenge for the TRY.”