Tumbling Turkish Lira Prompts EM Contagion Fears – Currency Analysts Say Rand And Real Vulnerable – Exchange Rates UK

The Turkish Lira plunged in Thursday trading amid concerns over market liquidity as the central bank continue efforts to underpin the TRY and avoid a repeat of 2018’s rout.

At the time of writing, the US-Dollar-to-Lira exchange rate was seen to be trading at 5.56624, 4.65% up from the session open.

Thursday saw the Central Bank of the republic of Turkey (CBRT) raise its total lira swap sale limit to 30% from 20% for swap transactions that have yet to mature following Monday’s raise from 10% to 20% as the central bank attempt to shore up bank’s forex reserves, which declined sharply in the first two weeks of March as investors aggressively sold the TRY.

Volatility for Lira markets has surged over the past four days with current levels unseen since 2004

Expected volatility among other EMs indicated that the most vulnerable EM currencies could be set for a bumpy ride alongside the Lira with analysts citing the recent price swings as similar to the conditions witnessed during 2018’s Lira meltdown and subsequent spread to other EMs.

Commenting on the potential for the Lira’s weakness to spill-over into other EMs, Wells Fargo strategist, Brendan McKenna, wrote “It looks like there is some contagion, mostly focused on the high beta currencies — the South African rand and the Brazilian real. That’s not that uncommon. Those currencies felt some pain after the lira crisis last year too.” Head of emerging-markets strategy, Jason Daw, at Societe Generale commented that high-beta EMs were the most vulnerable to spreading jitters, “The surge in FX swap points seems related to idiosyncratic factors in Turkey rather than a broader squeeze in dollar funding costs. With that said, investors are probably concerned that there could be some contagion to other EM currencies given the experience last year. High beta EM is most at risk from a deterioration in sentiment, but for Asia it is important to realize that the direct trade and financial linkages are very small.”

Senior strategist, Koon Chow, at Union Bancaire Privee expects the South African Rand to be particularly susceptible should the Lira plunge develop into a broader EM sell-off.

Chow wrote “The impact is probably limited unless we see a trend depreciation of the lira. A one-off lira depreciation should not have, if it happened, much of an effect because we are in a climate of low Treasury yields and low volatility.”

Before adding, “Of course there is a risk of a knee-jerk impact given the price action across currencies in July and August last year. South Africa is most vulnerable because of its largish current account deficits.”

Some analysts expect a wider impact, with a whole class of EMs expected to be driven lower – however, this outcome is reliant on an assessment that the current headwinds facing the Turkish economy are in fact not idiosyncratic and instead the result of a potential global slowdown. senior market analyst at Oanda Corporation, Jeffrey Halley said that EMs “tend to move as a bloc, so quid pro quo, we should see EM tarred with the same brush here in Asia,” adding “Turkey is perhaps a symptom and not a cause. The main driver being off course, a potential global slowdown which the rally in developed bond markets has been telling us is in the way all year.” Other analysts were more upbeat on the Lira, expecting the current factors weighing on the currency to fade over forthcoming sessions as liquidity issues ease and local elections pass.

EM fixed-income fund manager, Patrick Wacker, at UOD Asset management, wrote “We do not see contagion to other EM countries. This was a concern during Turkey’s FX crisis last year. Then as in now, we believe Turkey’s situation is unique.” Wacker added “While Turkish bonds are trading wide to their rating, we believe there may be a better entry point once we are past today’s reserves data and Sunday’s local elections.”

Similarly, Andrey Kuznetsov of Hermes Investment Management, expects the risks facing the Turkish Lira to be Lira/Turkey-specific, limiting the potential for spread. Kuznetsov said “Turkish volatility is entirely idiosyncratic and related to country specific events, such as the upcoming local elections.” He went on to add that emerging markets “benefit from more established financial markets and a dedicated investor base. The universe is no longer viewed as a homogeneous asset class, but rather a diverse group of countries with resilience to withstand a good amount of external volatility… Compared to the late 1990s when a crisis in one country or region could cause a meltdown in the broader universe, the situation is starkly dissimilar right now.”

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