Turkey investors take a bath

Today’s sharp slide in the Turkish lira (currently down -6% at $5.9446, but was down -15% at $6.200 at one point) has obviously seeped through into broader financial markets, causing the USD and JPY to jump on safe haven flows and equities to fall, while the EUR (€1.1469) is stung by concerns over European banks’ exposure to Turkey.

Today’s dramatic drop was instigated by a Financial Times report that the European Central Bank (ECB) is examining the Turkish exposure of several of the region’s banks.

“The ECB’s banking watchdog is monitoring the situation in Turkey and is in contact with eurozone banks about their individual exposures to the country.”

Nevertheless, it’s believed that the level of overall exposure of European banks to Turkey remains limited.

Data from the Bank for International Settlements showed that banks in Spain, France and Italy had the highest exposure to the Turkish economy at the end of Q1, adding up to +$81B, +$35B and +$18B, respectively.

The markets biggest concern is whether President Erdogan is threatening the independence of the Central Bank of the Republic of Turkey (CBRT).

The central bank left interest rates unchanged last month, and the belief is that political pressure is keeping the central bank from taking the necessary steps.

Now the train of thought is that an emergency interest rate hikes during this current currency crisis might only provide fleeting relief. They are expected to raise interest rates over the next week or two.

The market is currently waiting for Turkey’s Finance Minister to unveil their new economic model – odd’s are it will do nothing to stem the tide of negativity towards emerging market currencies at the moment.

Some other emerging-market currencies also weakened, with the ZAR ($13.8964 up +1.6%) and the Hungarian forint ($281.68 up +1.3%) both tumbling. The Russian ruble (RUB) has also hot a new two-year low this morning at $67.1518.

This article is for general information purposes only. It is not investment advice or a solution to buy or sell securities. Opinions are the authors; not necessarily that of OANDA Corporation or any of its affiliates, subsidiaries, officers or directors. Leveraged trading is high risk and not suitable for all. You could lose all of your deposited funds.

Dean Popplewell

Dean Popplewell

Vice-President of Market Analysis at MarketPulse
Dean Popplewell has nearly two decades of experience trading currencies and fixed income instruments. He has a deep understanding of market fundamentals and the impact of global events on capital markets. He is respected among professional traders for his skilled analysis and career history as global head of trading for firms such as Scotia Capital and BMO Nesbitt Burns. Since joining OANDA in 2006, Dean has played an instrumental role in driving awareness of the forex market as an emerging asset class for retail investors, as well as providing expert counsel to a number of internal teams on how to best serve clients and industry stakeholders.
Dean Popplewell