Greetings from Islamabad

I’m writing to you from Islamabad, the city we’re currently visiting on behalf of Altınbaş University. The sun rises two hours earlier in Islamabad as compared to Istanbul. So, I kindly ask you to bear this in mind when reading my analysis below.

As the US sanctions over Turkey are just around corner, let me remind you one thing if you’re one those who seem considerably surprised at seeing USD/TRY level: The most important characteristic of a floating rate is that you can buy foreign currency if you have the money, if you don’t you can’t. Its second most important characteristic is that people tend to buy the foreign currency they’ve previously bought when exchange rates start to rise. I remember clearly that when USD/TRY hit 3.00, 4.00 and 5.00 respectively, many people had called me to tell me that they’ve hit the jackpot. I don’t know what they’ve done afterwards but I’ve rarely seen amateurs who sold or bought foreign currency at the right time. This job strictly belongs to the professionals.

On the other hand, we don’t see a severe rise in exchange rates despite present diplomatic or political tensions as there isn’t enough liquidity in markets. There’s nothing to panic about either which would compel Institutions and Persons to decide not to pay their debt to third parties and buy foreign currency instead. This is the reason why exchange rates do not go up as expected.

By the way, I think I don’t need to be a fortune-teller to say that tensions in the Eastern Mediterranean will dramatically rise considering Turkish foreign policy completely depends on Trump’s power to cancel sanctions. Nevertheless, I might say that this situation will have only slight impact on market due the abovementioned reasons.

“Fed and diverse scenarios…”

Now, let’s tackle another important matter:

Changes in expectations for the Fed’s interest rate decision stood out as the most riveting economic development in the world over the course of the Ramadan holiday. According to surveys conducted by international financial institutions, the “rate cut” option seems as likely as the “at most one rate hike in 2019” option. If the latter becomes the stronger option, we might have to change our scenarios on the monetary policy.

And the sudden raise in exchange rate EUR to USD was the result of this change in expectations. In the light of the recent events, I wonder what type of a road map the ECB will release at its next meeting because both the Fed and the ECB had started their balance sheet reduction process at different levels. If there genuinely are changes in expectations, both institutions will be more likely to tackle these processes at a slower rate.

We have two different scenarios ahead:

  • “More liquidity, lower interest rate”. If this scenario becomes a reality, Turkey will have to put forward a narrative that is aimed to take advantage of this lack of liquidity and low interest rates. This might be a great opportunity for private as well as public sector. But, we should beware of countless rivals.
  • “Less liquidity, lower interest rates” In this scenario, market actors would invest in a very calm, controlled manner, aiming to make the best profit. Turkey would be more likely to attract funds through bond borrowing. Reducing future borrowing rates to lower levels can always be possible by rolling over investments in short-term bonds. This scenario, however, doesn’t really offer many options considering the current circumstances in Turkish Private Sector.

Obviously, there is a third option which involves “less liquidity, high interest rates” I must say that markets do not currently seem very welcoming about this option.