Selloff across CEEMEA ahead of Easter

Dünya Executive - - REPORT - Piotr Matys, EM FX Strategist, Rabobank

The Turkish lira remains the main source of attention in the CEEMEA sphere with USD/TRY price action over the past few days resembling a pulse of someone who is on a rollercoas­ter and may not necessaril­y enjoy the ride. The pulse of the lira is set by developmen­ts in domestic politics. On April 17, the lira trimmed its weekly losses after the provincial election board officially declared the Turkish opposition’s candidate mayor of Istanbul. The final count reportedly revealed that Imamoglu received 13,729 votes more than President Erdogan’s ally Yildirim. However, the respite for the lira proved very short-lived. So far today the Turkish currency is under renewed selling pressure amid market concerns that political tension could escalate in the coming days. The final decision regarding the crucial race in

Istanbul – Turkey’s main economic hub – is in the hands of the High Election Board. Earlier this week, Erdogan’s AKP applied for the Istanbul election to be cancelled and repeated, claiming various irregulari­ties during a vote that took place on March 31. If the High Election Board accepts evidence provided by the AKP and orders the local election in Istanbul to be repeated, this is likely to unsettle foreign investors. Such a decision would be the source of political uncertaint­y and would most likely provide USD/TRY with sufficient upside traction to break above the March 22 high of 5.8448.

The 6.00 level would be the next target for the USD bulls followed by the October high of 6.2282. Another source of concerns is the insufficie­nt level of FX reserves. While officially reported net foreign reserves stood at $28.1 billion in early April, calculatio­ns by the Financial Times imply that this total amount has been boosted by the Central Bank using short-term borrowing (swaps) to obtain dollars from banks. The FT calculated that reserves are significan­tly lower at $16 billion if stripping those swaps. In a written response to questions from the FT, the Central Bank acknowledg­ed publicly for the first time that its use of currency swaps “may impact reserve figures”, but said its method for accounting for them was in “full compliance with internatio­nal norms”. To our mind the use of swaps resembles a window dressing to boost FX reserves which are closely watched by investors at a time when the lira does look vulnerable. Instead of providing investors with reassuranc­e that reserves are rising, the use of swaps has done the opposite as today’s price action in USD/TRY implies.

(April 18)

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