Finland, which holds the EU presidency at the moment, said yesterday that the deadline for a deal with Turkey over trade with Cyprus and the opening of Turkish ports to ships from Cyprus had been moved forward to December 6, so the deal could be ready for the meeting of EU foreign ministers on December 11. That contributed to putting some pressure on the Turkish markets yesterday, and the weakness in the Turkish markets has continued today. The statement from the EU presidency was clearly meant to increase pressure on the Turkish government. The Turkish response, which came today, did nothing to improve the situation, when Turkish Foreign Minister Abdullah Gul said that Turkey would not respond to a deadline on the Cyprus issue and likened the Finnish deadline to blackmail.
This is certainly not good news, and it looks as if we are entering a game of chicken where neither Turkey nor the EU is willing to back down. We could therefore be heading for a dangerous train wreck in the (non)negotiations. Hopefully the issue will be solved, but even though we have long been fairly optimistic on Turkish EU negotiations, we are becoming more and more worried about the increasing unwillingness to compromise on both sides of the negotiating table. Turkish Foreign Minister Gul will go to Finland during the forthcoming weekend for negotiations with the Finnish EU presidency, so we shall keep our ears and eyes open for news out of Helsinki over the weekend.
This issue should be watched very closely in the coming weeks, and we expect it to increasingly become a market-moving topic. Risks are clearly towards more weakness in the Turkish FX and fixed income markets - especially in the light of the strong rebound in the Turkish markets since the end of June.
Our technical analysts say the technical picture is increasingly pointing towards lira weakness. Especially EUR/TRY is flirting with key technical levels, and a breakthrough could trigger a major weakening of the lira. The key resistance levels to a break are 147.51 for USD/TRY and 187.67 for EUR/TRY. If exchange rates break decisively through these levels, we could see a fairly significant move in a weaker direction for the lira, with the first target at just above 193 for EUR/TRY and 150 for USD/TRY - and with a risk of even weaker levels. So, bad news on the EU negotiations - for example, over the weekend - could cause the lira to break through key resistance levels.
