The Turkish lira fell to a new record low in early Asia-Pacific trade on Monday after comments by the country's president failed to reassure investors following Friday's heavy fall of the currency. Analysts are not optimistic about the outlook for the currency as the week starts.
Before the opening of the Hong Kong markets, the lira fell 6 percent to 6.8145 TL after the dollar broke through the TL7 mark before reaching an all-time low of 7.2149 TL.
Here is a brief summary of what analysts are saying about the lira and how it affects the markets.
AxiTrader chief market strategist Greg McKenna said:
The Turkish President's comments that this is an economic war and that he is trying to harass the business over the weekend have increased the pressure on the opening of the new week … as noted by Minister of Finance Berat Albayrak [Erdogan’s son-in-law] This morning, that the government will not go back and introduce capital controls … Call the rush on the exits.
NatWest Markets Head of Forex Strategy Mansoor Mohi-uddin said:
The currency weakened at seven today against the dollar after the Turkish authorities did not make any new key policy announcements over the weekend – before receiving temporary support when Turkey's banking regulator announced measures to limit swap transactions.
The risk of broader capital controls could provide additional support for the currency in the short term, but without substantial interest rate hikes, external support from the IMF or bilateral partners and the resolution of Ankara's dispute with Washington over a jailed US priest in Turkey, lira sentiment is likely to be fragile stay.
The weakness of the lira will keep Asian emerging market currencies under pressure as trade resumes today. Japan's yen has already hit 110.50 as investors become more risk averse this morning, while the euro has fallen 1.14 against the dollar.
Westpac senior currency strategist Sean Callow said:
It would only require small orders to produce a strong move in the lira at this time of day, but whether it's around 9 percent or 2 percent, the lira is a problem for the markets until there is a breaker like IMF support. .. Looking ahead, the Australian dollar and Asian currencies are likely to lag behind as concerns about Turkey weigh on global sentiment.
JPMorgan Asset Management global market strategist Kerry Craig said:
An increase in interest rates in the middle of the session (by the Turkish central bank) and a tightening of monetary policy could help to some extent prevent the decline in the lira. This could increase the volatility of emerging market assets and dampen investor sentiment in the short term as markets are already skeptical. However, the causes of the decline in the lira are very specific to Turkey, so it should not jeopardize the positive fundamentals in other emerging markets in the longer term.
The currencies have been different this year in terms of how they behave due to external positions. The large drops in the lira, the rand and the Argentine peso have not been reflected in many Asian currencies due to lower current account deficits (or even surpluses). This is reassuring in that the market differentiates between the strong and the weak.
And ANZ analysts noted:
The risks of contagion are concentrated in Spanish, Italian and French banks, which are exposed to Turkish foreign currency loans, as well as in Argentina and South Africa … A huge accumulation of foreign currency corporate bonds, but a rapidly fluctuating currency – and inflation exponentially – is a poisonous combination. .. [Australian dollar] Www.munichre.com/de/ts/engineering/…sses_01.aspx It has broken its narrow range and has fallen to a new low, as tensions in Turkey are influencing general market sentiment. With no real solution to the tension in sight, further losses are likely.