TRY: Turbulent times – HSBC

Politics matters again for the TRY, creating the now familiar risks of a negative feedback loop between the currency, inflation and FX liabilities as TRY outlook depends on diplomatic developments according to analysts at HSBC. 

Key Quotes

“The TRY has weakened sharply overnight as Turkey and the US have suspended their respective visa services. The scale of the TRY’s depreciation is similar to the July 2016 sell-off after the attempted military coup. Yet, we believe the political risk is very different in nature compared to that episode and think this depreciation looks excessive. But we believe the risk of a downward spiral in TRY cannot be ruled out – this will depend on diplomatic developments.” 

“From a pure economic perspective, the direct links between Turkey and the US suggest that the current tensions should have a limited impact on the TRY. The US is only a small market for Turkish exports (about 4.5% of total). The biggest risks for the TRY are centred on inflation dynamics and Turkey’s sizeable corporate FX liabilities, in our view, as well as the ability of the central bank to manage FX weakness.”  

“The recent significant acceleration of inflation to 11.2% y/y in September was seen as temporary by markets. Surveys, including the CBRT’s measure, have shown expectations for a sharp deceleration of inflation at the start of 2018. But a much weaker TRY may lead the market to re-price the inflation trajectory.” 

“The Turkish corporate sector’s short FX position of USD211bn is another risk. This vulnerability is always topical when the TRY depreciates sharply and could again come into focus.”