An early warning
On the last day of last week, there was increasing pressure on the Turkish lira. After teasing 5.45 on the evening of December 4, the dollar rate seems to have dropped to less than 5.35 at the time of writing. Undoubtedly, there was a significant increase in the volatility of the TRY last week.
On the other hand, the recent course of credit default swap (CDS) rates was also remarkable. In other words, we observed that CDS rates, which were above 500 basis points in the days when the dollar exchange rate increased to 7, fell to 350 basis points in the first week of November with the deceleration of the exchange rate. However, it was clear that the CDSs were again in an upward trend despite the fact that both the basket exchange rate loosened and we had incoming news that could be considered positive. Indeed, as of December 5, CDS rates reached over 400 basis points. Note though that there is a possibility of an intervention by the monetary authorities of Turkey in the course of this rate, unlike other market rates. The rising trend in this rate is a statement that foreign investors still find the Turkish market too risky.
I think, in this last activity, it is worth looking at the hot money investments called “carry trade.” Without a doubt, the interest rate increase of the Central Bank on September 14 and the release of Pastor Brunson on October 12 made the TRY attractive for trade. As a matter of fact, between October 13 and November 23, there was a hot money inflow of up to $4 billion. During the same period, the exchange rate fell from 5.80 to below 5.20. And when we take into account a TRY return of up to two percent per month, this meant a very good profit for the hot moneymakers. As the yearend approached, traders who were in a hurry to close their accounts and get their bonuses tried to close their positions a little bit early which led to volatility in exchange rates. (We didn’t see a parallel move in bond yields; as data have confirmed, there was no intense entry into these instruments at that time.)
Another reason for the closure of positions is that positive data inflow concerning emerging markets, and Turkey in particular, have not lasted. From last week declining oil prices, and more improvement in relations with the U.S. (especially in the S400 and Syria context) and headline inflation are not expected to improve. On the contrary, other risks may become evident as we enter the election period.
After all, I personally think that this latest mobility is predominantly hot money-driven. However, this was also an important early warning as it reminded us of the seriousness of the issue in recovering the economy.