Over the weekend, I was concerned that we would see the Turkish Lira collapse as Forex markets opened for the week. Although the Lira did fall further yesterday to get slightly lower than 7 to 1 U.S. Dollar, it has recovered in recent hours to trade around 6.5. The most interesting thing about this firming is that it has taken place naturally, without any emergency measures or rate hikes from the Turkish central bank. The free market seems to have been satisfied with 7, for now. It is true the Turkish central bank did take minor measures to strengthen liquidity, and that a few Forex transactions experienced a little delay, but no serious measures were taken.
President Erdogan made a speech earlier today in which he repeated his previous strong backing for the Lira and the policy of the central bank. He threatened a national boycott of American electronic goods such as the iPhone in response to the recent U.S. sanctions. He says that there is no fundamental reason for the fall in the Lira and states there is a “plot” and “attack” against Turkey. However, he acknowledges that inflation is too high, and that plus the high amount of U.S. Dollar-denominated corporate debt, are the true causes of the current crisis. He is also repeating very veiled threats to leave NATO and cooperate more closely with countries hostile to the U.S. – such measures would certainly have a much greater impact upon the U.S. than a Turkish boycott of the iPhone!
The Forex market generally has been quiet today. This crisis will certainly develop further, but is currently in a lull, and it seems no new initiatives will be taken by either side for the time being. It is hard to see Erdogan accepting the political and personal humiliation of an emergency rate hike, but this will again be on the table if the Lira begins to fall sharply again to new all-time low prices.
A piece of good news: feared “contagion” spreading to certain European banks seems to be exaggerated.