The Turkish lira hit an all-time low as USD/TRY jumped almost 23.4% today following a speech by the President Recep Tayyip Erdogan, where he spooked investors by choosing to continue his path of confrontation with the US and calling for Turks to hand in their US dollar and gold holdings.
Shortly after, TRY's turmoil deepened on President Donald Trump's tweet, which mentioned doubling of tariffs on metals, citing bad relations with Turkey.
Erdogan's speech contained no hint of hikes by the Turkish central bank (TCMB) . While we do not fully exclude an option of a massive hike by the TCMB, we believe that probability of capital controls has greatly increased.
We do not exclude the possibility that Erdogan could revert for financial support to Russia.
Assessment and outlook
The Turkish lira saw its own Black Friday as markets became more disappointed on President Erdogan's speech at a rally. The speech was long-expected, and the disappointment amplified the move in the USD/TRY pair. Our wrap-up from the speech:
The President's major lines remain unchanged: no rate hikes were hinted at.
Erdogan urged citizens to save the TRY by bringing EUR, USD, gold to the banks.
Erdogan said nothing about the imprisoned American pastor. That hits investors' hopes of a geopolitical de-escalation in Turkey-US relations.
A nail in the TRY's coffin came from the US, as Trump tweeted: 'I have just authorized a doubling of Tariffs on Steel and Aluminium with respect to Turkey as their currency, the Turkish Lira, slides rapidly downward against our very strong Dollar! Aluminium will now be 20% and Steel 50%. Our relations with Turkey are not good at this time!'
We will wait for the announcement of Turkey's new five-year economic programme, which should be released in three weeks. In the meanwhile we emphasise that the risk of capital controls has increased on Erdogan's reluctance to support rate hikes by the TCMB and that these controls could be considered over the weekend or next week.
Later on Friday 8 August, reports came about Erdogan's talks with President Vladimir Putin on economic ties. As we mentioned earlier in our previous piece on the TRY, we see the possibility that Turkey could get FX funding from Russia. However, upcoming US sanctions against Russia bring more uncertainty.
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