"The honeymoon is over," warned SocGen overnight as "the trade of the year" turned into carnage after, essentially, a big policy error on the part of the central bank in the context of serious political pressures. Just today President Erdogan explained to whoever would listen that "interest rates are the cause of inflation," and "some are trying to hold Turkey back with interest rates," adding that "you can't decide interest rates based on inflation." However, his conclusion was what really sent the Turkish Lira spiralling... "unfortunately, this is the result of an independent central bank."
- *ERDOGAN: SOME TRYING TO HOLD TURKEY BACK WITH INTEREST RATES
- *ERDOGAN: YOU CAN'T DECIDE INTEREST RATES ACCORDING TO INFLATION
- *ERDOGAN: INTEREST RATES ARE THE CAUSE OF INFLATION
- *ERDOGAN: UNFORTUNATELY, THIS IS RESULT OF INDEPENDENT CENBANK
The Turkish Lira collapses almost 5 handles today to new record lows against the USD
As SocGen warns, The honeymoon is over
Turkey was supposed to be the big trade of the year. After all, it did look particularly good at some point, with the sharp decline in inflation and the collapse in oil prices. Somehow, Turkey had become the new darling of global emerging markets (GEM).
Fast forward a month or two and this is now all over.
So what happened? Essentially, a big policy error on the part of the central bank in the context of serious political pressures. The emergency meeting saga caused tremendous damage to the credibility of the policy framework and to investor confidence.
I am in the US visiting investors right now, and nobody is bullish on Turkey any more.
Last time I was there, everybody was. If I had been in the governor’s shoes, I would have stayed quiet and continued easing normally at each scheduled meetings. Nothing wrong with that, and in fact, Mr. Market was going to love it. I would also have looked up the definition of “emergency” in the dictionary.
The TRY selling off by 2% each day, causing serious stress in the local financial market? An emergency.
Inflation declining a bit faster than usual, helped by fortunate external factors? Not an emergency.
Overall, this was a highly disappointing experience and now the CBRT has moved to my list of “fading” central banks from that of the “following” ones. What I mean by that is I want to position for policy backtracking in Turkey at this point, given the heightened risk of policy volatility. Our 1s5s curve steepener has been struggling quite a bit, as it was a bullish trade on market-friendly policy easing. We just elected to close it at flat PnL.
Meanwhile, I believe that positioning is still heavy on the Turkish bullish side, even if sentiment has sharply deteriorated, which represents a major technical risk.
* * *