- The Lira depreciates around 2% as concerns among traders increase.
- Turkey 5-year CDS rose beyond 400 bps, highest since September 2018.
- Municipal elections on March 31 remain in centre stage.
The Turkish Lira is reversing recent gains and is now pushing USD/TRY to fresh daily highs in the boundaries of 5.45, around 2% higher for the day.
USD/TRY looks to elections
After bottoming out in fresh 4-week lows in sub-5.30 levels on Tuesday, the pair is now sharply higher in response to heightened concerns surrounding the Turkish currency.
In fact, TRY is under rising pressure as 5-year Credit Default Swaps (CDS) climbed above 400 bps, levels last seen in the summer 2018 during the Lira crisis. Fanning the flames, the overnight swap rate climbed further to levels around 750% from yesterday’s already high levels around 300%, only seen during the 2001 financial crisis.
The Lira came under renewed and strong pressure today following two consecutive days of recovery in response to measures implemented by the CBRT (Turkish central bank) to restrict liquidity.
In addition, effervescence keeps running high in both the financial and political scenarios ahead of the key municipal elections due on Sunday, considered by many as a referendum over President Erdogan’s policies.
What to look for around TRY
The Lira is expected to remain under pressure in the near to medium terms despite the sentiment in the risk-associated space and around the EM FX universe has somewhat improved in past weeks. The next key event in Turkey will be the municipal elections (Sunday), considered crucial as the much-need structural reforms are expected to kick in soon afterwards. Furthermore, TRY will remain in the centre of the debate ahead of the elections, as unwelcomed weakness in the currency could prompt an emergency rate hike by the CBRT. This scenario will surely collide with Erdogan’s intentions of lower rates and undermine at the same time the efforts of the economy to recover from the current recession.
USD/TRY key levels
At the moment the pair is gaining 2.26% at 5.4425 and faces the next hurdle at 5.4658 (200-day SMA) seconded by 5.6371 (high Jan.3) and then 5.8413 (2019 high Mar.22). On the downside, a break below 5.2918 (low Mar.26) would aim for 5.1594 (2019 low Jan.31) and finally 5.1304 (monthly low Nov.29 2018).
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