• Tensions between Turkey and US soar as Trump orders new sanctions
• Turkish President asks citizens to buy Lira to response to economic attack
• Monetary policy exacerbates inflationary risk
• US sanction dampens sentiment, raising challenge of debt financing
• Turkish currency crisis hits sentiment
• EUR in deep worry of Turkish contagion
• Turkey to remain in focus

The USD, JPY and CHF traded as the strongest currencies last Friday as supported by solid safe haven flow. The free fall in Turkish Lira (TRY) raised concerns of contagion to Eurozone financial system. Such worries send the EUR broadly lower, even though AUD performs even worse. Crisis speech of Turkish President Erdogan did not ease the worries a little bit. EUR remains generally weak and is vulnerable to deeper fall. Adding to that, USD was also firmed after stronger than expected core inflation reading.

While US sanctions against Turkey have dominated news headlines, recent selloff of TRY is a vote of dissent to the policy of the new government. After his “re election”, President Tayyip Erdogan has grabbed tighter control of the economic and monetary policies. However, the policies implemented have failed to alleviate the most serious problems facing the economy, namely high inflation and rapid currency depreciation. Rather they have exacerbated the problems. The latest US sanctions has further eroded market sentiment. However, even if a deal is eventually reached, the policies dictated by President Erdogan would remain the biggest hurdle to investors’ confidence over Turkish economic and financial situations.

TRY which traded at 4.7 to the USD a month ago, weakened to 6.4 to the USD on Friday. TRY extended its precipitous slide Monday after Turkey’s President showed no signs of backing down in a standoff with the US. The TRY weakened past 7.23 per USD in early Asian hours.

Source: BIMB Securities Research - 14 Aug 2018