Global macro overview for 21/08/2018
On Monday, the 13th of August, Turks woke up with a course of lira at the level of 7 per dollar, it became clear that the current policy in combating the crisis did not pass the exam. The joint actions undertaken by the government and the Turkish central bank at that time allowed the campaign to stop the downward spiral and the relative stabilization of the lira exchange rate at slightly below 6 per dollar. Lira is still losing about 38% values from the beginning of the year, but it seems that you have mastered the panic, well, at least for now.
Already a week ago, the support of the sinking lira came from the Turkish central bank. A statement appeared on his website that if necessary, the banking system would be helped by any liquidity. In addition, it enabled banks to take monthly currency loans, and not only weekly loans, as before. They also increased their foreign currency lending limits and relaxed the hedging and reserve policy in foreign exchange transactions, thus freeing about $ 6 billion in additional liquidity in banks.
In conclusion, markets participants that were afraid whether Turkish financial institutions will be able to continue servicing their dollar liabilities have been somewhat calmed down. “A bit” because analysts agree that what Turkey really needs today is a significant interest rate increase. This, however, can not count on two reasons. First of all, the next meeting of the Turkish central bank in this matter will take place on September 13. Secondly, Turkey’s President Recep Tayyip Erdogan strongly opposes any increases, which in a way binds the hands of the central bank increasingly dependent on the head of state. However, the Central Bank of the Republic of Turkey is not completely defenseless in this situation and appealed to the tried and tested methods, ie raising interest rates through the back door. After the May increase in the cost of money in Turkey, the monetary policy would normalize. The basic interest rate was a weekly repo loan rate set at 17.75%. It was supplemented by an overnight lending rate of 19.25%. Thanks to this, if necessary, the central bank could manipulate the average weighted cost of financing banks by choosing the right proportions for loans – the more overnight loans, the higher the cost of money for banks.
Meanwhile, at the end of last week, the central bank completely closed the cock with weekly repo loans, forcing banks to borrow at an overnight rate. Thus, the effective cost of money for banks increased by 1.5 points percent. Officially, monetary policy has not changed, but in fact, rates have increased. And the markets are happy, and the president is not angry.
Although the past week brought relative stabilization of the lira exchange rate and temporarily restrained the wave of falling currency values, it ended with an unpleasant event for Turkey, namely a downgrade by S&P rating agencies to the level of B + and Moody’s rating agency to Ba3. This means that, according to the agency, Turkey is currently able to settle its obligations, but is experiencing problems that put into question its ability and willingness to service debts in the future. The probability of bankruptcy with such an assessment is estimated at about 2.0% during the year and 12.0% within 5 years.
Although credit rating reduction was expected and already included in the lira course, it is also an important warning signal. None of the measures taken by the Turkish government and the central bank last week solves the fundamental problems of the Turkish economy, i.e. excessive foreign debt, the largest current account deficit among OECD countries and the instability of the banking system caused by excessive credit expansion. A certain change in this respect may result in the disclosure of more details of the economic program announced by Minister Albayrak, but it does not have to.
Let’s now take a look at the USD/TRY technical picture at the H4 time frame chart. The market is now trying to break out above the trend line resistance around the level of 6.04. The nearest resistnace is seen at the level of 6.41 and the nearest support is seen at the level of 5.68.