CURRENCY IN CRISIS

There’s really no other way to put it: the Turkish Lira is in the midst of a currency crisis. Since the surprise 100-bps rate cut by the Central Bank of the Republic of Turkey at the end of September, USD/TRY rates have risen by nearly +27% and EUR/TRY rates have risen by almost +20%. The CBRT has lost all semblance of an independent central bank under Governor Sahap Kavcioglu’s term, thanks to heavy-handed pressure from Turkish President Recep Tayyip Erdoğan.

The currency crisis plaguing the Turkish Lira this week has already taken one turn for the worse, and another deleterious shift may be on the horizon with the CBRT anticipated to deliver another rate cut when it meets on Thursday. News emerged today that Turkey's short-term external debt stock rose to $124.4 billion, an increase of +8.8% since the end of 2020.

The rise in USD/TRY and EUR/TRY rates will only exacerbate the debt problems facing Turkey over the coming months. According to data released by the CBRT, nearly 43% of the country’s debt was denominated in US Dollars, and just over 25% was denominated in Euros.

EUR/TRY [ORANGE] & USD/TRY [BLUE] TECHNICAL ANALYSIS: DAILY PRICE CHART (NOVEMBER 2018 TO NOVEMBER 2021) (CHART 1)

(Click on image to enlarge)

As observed at the end of September, “the CBRT may have set the Turkish Lira back on a path towards more significant weakness through the end of 2021.” It remains the case that the factors are in place for the situation to become more dire, per the Emerging Markets Crisis Monitor: record inflation (and record low real yields), a negative current account, rising implied FX volatility, widening bond risk premiums, and a rising external debt burden are hallmarks of an emerging market currency in crisis.