Overview
Turkey is facing several crises stemming from multiple fronts, particularly with its western allies. The first and foremost issue entangling the country’s already fragile economy is the threat of devastating US sanctions in response to Ankara’s purchase of S-400 missiles from Russia.
The missiles’ ongoing delivery that began late last week has ensured imminent American sanctions under the CAATSA law. Although Turkish President Recep Tayyip Erdogan downplayed the possibility of sanctions coming into effect, US Secretary of State Mike Pompeo has said that he was sure President Donald Trump would abide by the law that requires him per Congress to sign the CAATSA measures against Ankara.
The Turkish Lira remains under pressure which is likely to become immense once the US moves to punish its NATO ally.
American media have reported that those sanctions are to be activated sometime this week after a Monday holiday in Turkey that commemorates the failure of a coup d’etat three years ago.
The second flashpoint is Turkey’s worsening relations with the European Union, the bloc it has unsuccessfully tried to join for decades.
The EU is preparing to cut contacts and certain funds for Ankara in retaliation for Turkey’s drilling activities for gas and oil off the shores of Cyprus. The EU is also ready to impose a set of sanctions on Turkey.
The island nation’s government supported by Greece, the US, and other Eastern Mediterranean countries of Egypt and Israel, has complained to Brussels for what they call Ankara’s “illegal” drilling. Ankara on the other hand stands its ground on the basis of national interests and the rights of the Cypriot Turks.
Another issue weighing on the Turkish economy is Erdogan’s decision to sack the Central Bank governor Murat Cetinkaya over the latter’s resistance to President’s repeated calls for cuts in the rate cuts. Erdogan made clear that the bank from now on will be moving in the direction his administration demands, a move that has led to further deterioration in international investors’ confidence in Turkey.
The New York-based ratings agency Fitch downgraded Turkey’s sovereign rating to “BB-“ from “BB” on Friday. Fitch justified its decision on Cetinkaya’s firing. Erdogan rejected the rating and vowed what mattered to him was “the people’s rating.”
Cetinkaya’s dismissal “risks damaging already weak domestic confidence (evidenced by rising dollarisation), jeopardising the inflow of foreign capital needed to meet Turkey’s large external financing requirement and worsening economic outcomes,” Fitch noted.
In the week ending July 12 Turkish lira lost more than 1.5% in value against the US dollar. A strong sell-off was triggered after President Erdogan dismissed the central bank governor for failing to cut interest rates. To boost the economy, Erdogan has called for rate cuts. The Governor Cetinkaya’s disobedience cost him his job. During the week some of the value was regained as the Dollar index lost steam. The Fed Chair Powell congressional testimony dragged the Dollar down as he indicated a rate cut at the end of July. Powell promised to “act as appropriate” in response to global growth slowdown and trade wars. However, the latest macro-economic data in the US indicated a better-than-expected economic outlook. Imminent US sanctions on Turkey in response to the delivery of Russian S-400 missile defence system will be the main determinant in the direction of pair price. The Lira has already suffered a new fall. The pair is trading far below the 50 MA with RSI advancing suggesting the dollar strengthening may proceed. Pair overall retraced to 61.8% Fibonacci of the rise ended in May. However, potential sanctions will go against the Lira and the pair could advance to 5.7800 resistance. Markets are also expecting rate cuts to follow thus breaching the resistance will make way to 5.8500 level. Support is set on 5.6500 with next to consider on 5.5700.
The pair retraced to 50.0% Fibonacci advancing to the upper band of the descending channel. Some of the gains against the euro came amid the nomination of IMF chair Lagarde for the ECB president who is perceived to be highly dovish. Moreover, in its latest announcements, the IMF urged fresh stimulus from the ECB to deal with the rising economic pressures due to trade disputes, Brexit and Italy. However, the EU could curb funding for Ankara and ramp up sanctions in response Turkish drilling for gas and oil off the coast of Cyprus. The bloc would stay on the side of its member state and possibly increase the sanctions further. On the data side, industrial production in Turkey came a bit positive falling less than expected by 1.3% instead of 2.4%. Overall, the economy contracted 2.6% in the first quarter. Investors expect the central bank could start easing monetary policy at a July 25 meeting and cut its 24% benchmark interest rate by 200 basis points. In the Eurozone industrial production rose 0.9% more than expected 0.2% after contracting last month. It helped the price to break above the upper band and opened the way to 6.6000 resistance. A break above puts 6.7000 in sight. Support is found at 6.4000 with next on 6.3300.
Latest developments dragged lira down against pound and most of the other currencies. Central bank’s independence was put in question after Erdogan sacked the governor Cetinkaya. Political tensions between the US and Turkey over the Russian S-400 missile defence system also pressure the lira. The four-hourly chart reveals us the pair advanced above the 50 MA with RSI advancing to an overbought area. It may suggest further rising which would be highly supported by the heightening rhetoric between Turkey and the US and EU. Pound on the other side suffers from political uncertainty as the October 31 deadline is approaching. No-deal Brexit is still on the table with very much likely to be delivered by Johnson as the new PM. Investors were induced to sell the pounds and buy lira due to a considerable difference in interest rates. However, CRBT is likely to cut them and along with the fresh sanctions on the new selloff could be triggered. Pair breached the upper band of a descending channel opening way to 7.3000 resistance with next on 7.3700. Support is held at 7.1600 and 7.1000 levels.
Gold kept on rising and moving between the bounds of a steep ascending channel. Holding above the 50 MA on a daily chart with advancing RSI the trend is likely to continue. New threats of sanctions on Turkey could be supportive of the bullion. Moreover, the rising expectations of a rate cut could underpin the prices. In the rest of the world, some of the fundamentals came positive but the question is whether it will be enough to reverse the current monetary stance. Falling lira would provide the holders of gold to buy more at a cheaper price. Cetinkaya’s sacking and the delivery to Turkey of Russian air defence systems, may trigger US sanctions and put the lira under renewed pressure supporting the precious metal. The price of gold could advance to 265.00 resistance level. Break above could put the 270.00 level in sight. Support is found at 255.00 and next on 250.00 level.
