Emerging Market Currencies: TRY Harder

Most of the world appears to be adjusting to the reality that the end of the US Federal Reserve’s long-term easing cycle is finally in sight. In the past month, emerging market central banks that are facing weakening currencies and high inflation have hiked interest rates aggressively, with big tightening this week from Brazil (50bps, as expected) to Indonesia (also 50bps, but unexpected).

The notable holdout from this trend is Turkey, where the Central Bank of the Republic of Turkey (CBRT) has resisted raising rates in the face of a colossal and unsustainable current account deficit, and instead has sold US$6.2bn of foreign exchange reserves since June 11 to prop up the weakening lira (leaving a dangerously-low two months of import cover).

The lira is holding around multi-year support of TRY1.9700/US$. While our core view is for general stabilisation, there are significant risks to the downside (a push through TRY2.0000/US$ is very plausible) so long as the CBRT hesitates to raise rates and ends up burning through its forex reserves. In general, we believe that emerging market currencies will remain under pressure as the US dollar regains ground over the coming years, but the individual policy response will be crucial in determining whether key emerging market economies enter a crisis or merely undergo an adjustment.

Full coverage of emerging market currencies, including forecasts, is available to subscribers at Business Monitor Online. Meanwhile, the latest edition of our weekly Emerging Markets Monitor publication includes currency forecasts for the Brazilian real, Turkish lira, and Pakistani rupee.

This Week’s Trivia Question:

Last week’s question was as follows: Which early 1980s blockbuster film featured a plot by the villain to manipulate the world’s coffee markets by using a satellite to create storms in Colombia, to control the world’s oil supplies by ordering all oil tankers to convene at a point in the Atlantic Ocean, and to paralyse a major American city with a cyber-attack? The answer is Superman III (1983). The cyber-attack on Metropolis was particularly far-sighted, in light of current concerns about cyber warfare.

This week’s question is as follows: Which Latin American country had a currency in the 1980s that almost entirely shared the name of a country many thousands of miles away, and still has an airline with the same name as that former currency?