And The World's Most Volatile Currency Is...

A year ago it was the Ruble, but for much of the last year it is the South African Rand that has been the most volatile currency in the world. That is until the last week, as Turkey deals with rising domestic instability (and Erdogan's push for total rule), the Lira has become the world's most unstable currency...

As we noted earlier, market focus has turned on the lira as a result of Turkey's large external borrowing requirement which makes its currency one of the most vulnerable currencies to tightening by the Fed.

Not helping matters is that Turkish residents have been flocking to the stability of hard currencies, the opposite of what President Recep Tayyip Erdogan has been urging. As the following Bloomberg chart shows, deposits in foreign exchange for individuals and companies excluding banks rose for a third week, signaling a lack of confidence in the lira. It’s the biggest loser among world currencies so far in 2017.

 

 

Additionally, Turkish economic growth has remained sluggish and inflation is rising, yet the central bank has been under pressure from President Tayyip Erdogan not to hike interest rates. A series of gun and bomb attacks have heightened security concerns. On Tuesday the Turkish parliament voted to press on with a debate about constitutional reform to strengthen the powers of President Tayyip Erdogan.

 

"Nobody wants to be the last one in there and everyone is running for the door. There are no signs from the authorities that they are taking it seriously," said Jakob Christensen, head of EM research at Danske Bank. Christensen said the risk of further attacks was undermining the tourist sector, which is vital for the economy and balance of payments.

 

Making matters worse, and confirming the currency crisis is becoming one of credit, Turkish five-year credit default swaps rose four bps to 288 bps according to Markit data, a one-month high, and the yield premium paid by Turkish sovereign bonds over U.S. Treasuries on the JPMorgan EMBI Global Diversified widened out 4 bps to 377 bps.

Of course, some might suggest there is an 'alternative' currency that is more volatile than the Lira...