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Turkish lira isn’t done underperforming, analyst says

10th October 2017

The U.S. dollar started this week with a significant jump against the Turkish lira, after a diplomatic rift between the two allied nations culminated in the termination of nonimmigrant visa services on both sides on Sunday.

And there could be more pain to come for the Turkish currency, an analyst said.

“Frankly, this sort of spat between NATO allies is highly unusual but caps off months of escalating tensions,” wrote Win Thin, EM FX strategist at Brown Brothers Harriman, adding that relations had worsened ever since last year’s attempted coup.

The mutual visa termination came after Turkish authorities arrested an employee of the U.S. consulate in Istanbul, alleging the employee was involved with the failed coup in 2016. Complicating the geopolitical tension, Kurdish voters in Iraq voted in favor of their independence in September, Turkey’s Kurds are yearning for a referendum of their own and Syrian Kurds are supported by the U.S., which is making Turkey uneasy, Thin said.

But uneasy or not, the U.S. is Ankara’s fifth biggest market for Turkish goods, and worsening relations could be damaging for the country’s trade, Thin wrote. Moreover, worsening security concerns over the past years along with the visa spat aren’t helping tourism in Turkey.

On Monday, the dollar jumped 3% against the lira USDTRY, -0.4431%  buying 3.7238 lira—its highest level since April—compared with 3.6149 late Friday in New York.

The U.S. dollar has rallied against the Turkish lira over the past year.

In 2016, the lira fell 21% against the dollar, making it the worst-performing emerging-market currency with the exception of the Argentine Peso USDARS, -0.0029% In the year-to-date, the ranking looks similar, Thin said, and the dollar has risen 5.5% against the lira so far.

Furthermore, a “break of the 3.73 lira area sets up a test of the all-time high from January near 3.94,” he said.

“Our EM FX model shows the lira to have VERY WEAK fundamentals, so this year’s underperformance is likely to continue,” wrote Thin. Turkish bonds have also performed poorly, and the country “continues to face strong downgrade risks to its BB/Ba1/BB+ ratings”


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