Let’s not underrate turbulence
The sentiment we all held for the last couple of months seems as if it’s reversing. The star of foreign exchange markets was the euro but it’s now paving the way for the dollar. It doesn’t necessarily mean that the European economy is stumbling once more. On the contrary, Europe maintains the positive outlook it gained in recent months. This change is more about the improvements in the US. It’s possible to note a recovery based on two main tracks. Firstly, positive improvements observed in the course of the economy. Secondly, the weakened risk perception related to President Donald Trump slowly starting to reverse in certain areas.
All these improvements also influence expectations positively and therefore increase the risk appetite and demand for US financial assets. The US Treasury interest rate has reached 2.40% and the majority believe it will only increase further. The increase in Treasury interest rates support the appreciation of the dollar, which is the most appreciated asset among all others.
Things may not be on the rails in the US and risk perception may be unfavorable, interest rates may stay relatively low in the national economy or all these may collide. In such cases, we know that a significant part of the dollar goes to emerging markets with relatively high interest rates and high risks under control. Hot money is addictive. It suddenly becomes all rosy. One may think that growth will soar. But it’s not a permanent state. When indicators reverse, as they are doing now, hot money goes back home. Emerging markets are dumped by the hot money and literally fall into a pit. Their currencies depreciate and growth declines to zero. We call it “turbulence.”
Turkey is simply one of the emerging markets addicted to hot money. We may even call ourselves a senior fellow in the matter. The tremor experienced in the last couple of days seems like a state of turbulence. Foreign exchange that returned to Turkey in recent months is now starting to depart. There are negative effects in the economy, especially in financial assets.
But it seems we have a tendency to pass it off and dodge the issue by saying, “It’s just turbulence. It will go away. There is nothing we can do about it.” That’s the wrong attitude. There is no such hard turbulence going on in countries “that have cleaned the house well” despite facing the same conditions. But Turkey is among the biggest losers. If you pay attention you will see it’s all the same.
When scrutinized it is the same today. I believe it will be useful to discuss the matter of turbulence once more. It would at least help Turkey to hedge against future bouts of stormy financial weather.