Underperform ng w ll cont nue

Tens ons between the US and Turkey are r s ng. Taken together w th poor econom c fundamentals, we bel eve Turk sh assets are l kely to cont nue underperform ng. As tddn 2016, the l ra cont nues to underperform. In 2016, TRY fell -17% vs. USD and was ahead of only the worst performer, the Argent na peso (-18%). So far n 2017, the l ra s -5.3% year-to-date and s ahead of only the worst emerg ng markets performer, the Argent na peso (-9%). Our EM FX model shows the l ra to have part cularly weak fundamentals, so th s year’s underperformance s l kely to cont nue. Fore gn reserves have stead ed after fall ng over the course of 2015 and 2016. At $91.5 b ll on n September, they cover nearly 4.5 months of mports but account for only half of the stock of short-term external debt. Th s s among the worst n emerg ng markets. Indeed, there are only a handful of EM countr es – Malays a, Ukra ne and South Afr ca – whose reserves are smaller than the r short-term external debt. Furthermore, so-called usable reserves (wh ch net out commerc al bank FX depos ts at the central bank) currently stand at only $28.8 b ll on. The dollar/l ra cross couldn’t susta n a break below 3.40 last month and turned h gher. The low for th s move was recorded on Sept. 11. A break of the 3.73 area sets up a test of the all-t me h gh from January, near 3.94. In between s the Apr l 7 h gh, near 3.75. We ant c pate that the h gh carry currenc es so popular earl er th s year w ll cont nue to fall out of favour now that the Fed s to start shr nk ng ts balance sheet and cont nue h k ng rates.

(Oct. 9)