The nosediving Turkish lira (TRY) found another reason to head south when US President Donald Trump late on May 8 announced that he was withdrawing Washington from the multilateral nuclear deal with Iran and reapplying the highest level of sanctions to the Islamic Republic, Turkey’s second largest energy supplier.
The TRY recorded a historically weak level of 4.3371 against the USD soon after Trump’s announcement. By 22:30 local time it was trading at 4.3275, marking a 1.40% d/d deterioration, while by 09:25 on May 9 it had further sunk to its latest all-time low of 4.3668.
The Borsa Istanbul had already been hit by souring expectations for the Trump administration’s approach to the nuclear accord. The benchmark BIST-100 fell 1.49% d/d to 99,364 by the close on May 8, the lowest level in 10 months.
Meanwhile, the benchmark 10-year bond yield moved up to 13.97%, marking a gain of more than 100 basis points in the last four trading days.
The TRY has a relatively high sensitivity to rising oil prices given Turkey’s dependence on energy imports, and crude prices could indeed be set to rise after Trump’s restores sanctions that curtail Iranian oil shipments.
Turkey is also still dealing with fallout from the so-called Reza Zerrab Iran sanctions-busting case involving Turkish state lender Halkbank.
May 9 will be an intriguing day for Turkish markets with Turkey already dealing with a solid set of risk fields fuelling anxiety among market players.
Markets are worried whether that the central bank has what it takes to fight Turkey’s stubborn double-digit inflation.
Snap elections called for June 24 have generated added uncertainty for market players.
The long list of reasons for the TRY’s sharp decline include the global appreciation of the dollar, with the 10-year US Treasury yield breaking above the psychologically important level of 3%; S&P’s surprise move on May 1 to cut Turkey further into junk on the growing risk of its overheating economy experiencing a hard landing; the ballooning current account deficit; pre-election fiscal expansionary policies; latest PMI data on manufacturing pointing to contraction and signs of corporate debt difficulties that could leave the country’s banks exposed to burdensome problem loans.