The Turkish lira (TRY) plumbed another all-time low in early trading on April 6 as investors continued to fret over a weighty set of domestic economic risks and a glum mood prevailed over emerging markets with the White House and Beijing intensifying threats of tariffs that could trigger a trade war. It has now declined by 7% against the dollar since the start of the year and is approaching five lira to the euro.

The weakest TRY rate against the dollar on record, TRY4.0665, was registered by the market during the morning, but by around 17:15 Istanbul time the currency had trimmed its losses to TRY4.0385 with the dollar weakening after March data showed US employers had added fewer jobs than expected. The lira’s losses had accelerated the day before as traders worried over speculation that Deputy Prime Minister Mehmet Simsek, seen by some analysts as the last truly “market friendly” member of the cabinet and a restraining influence on populist President Recep Tayyip Erdogan, may have resigned. However, with Hurriyet reporting Prime Minister Binali Yildirim as saying Simsek remained in his job, the markets turned to other anxieties, particularly reports that an Erdogan team is working on an unorthodox economic stimulation package to be announced within two weeks.

Concerned by Turkey’s large external financing needs and its sticky double digit inflation, investors in Turkish assets have been further unnerved by Erdogan’s renewed criticism of those pushing for monetary tightening, and fresh reports of government plans to lower interest rates. Hurriyet outlined on April 6 how the government is to introduce a TRY40bn Single Treasury Account to fight against high interest rates.

“It will spook investors if they carry through this lowering of interest rates through the back door, as it will lower the appeal of Turkish short-term assets for carry traders,” Jakob Christensen, head of EM research at Danske Bank, told Reuters.

The next scheduled meeting of the monetary policy committee of the Central Bank of the Republic of Turkey is on April 25.

In a further demonstration of the level of anxiety on Turkish markets, the yield on Turkey’s domestic benchmark 10-year sovereign bond moved up to a fresh record high of more than 13%. The yield on 2-year benchmark bonds rose to the highest point since early 2009, growing to 14.52% from 14.37% at end-April 5. Meanwhile, the cost of insuring exposure to Turkish sovereign debt climbed to its highest level in eight days. Turkish five-year credit default swaps (CDS) rose 2 basis points (bps) from the close on April 5 to 198 bps, IHS Markit data showed.

Investors are also not impressed by Turkey's current account deficit, one of the worst in the world. It now stands at near 6%, making the Turkish economy the weak link among emerging markets, according to BNP Paribas.

Against a background of waning demand for emerging market assets, Bloomberg reported that one-month implied USD/TRY volatility climbed 20bps on April 6 and 98bps this week to 11.35%, the highest level seen since February 22.

The news agency also quoted TEB strategist Erkin Isik as saying in a note that “corporate investors will be less willing to lower their FX deposits further, given that their open FX position is very high at USD222bn as of January”.  He added: “FX deposits of individual investors is only USD1.6bn above its low reached last November, so we think they have limited room to provide FX liquidity to the market as well.”