Possible sanctions on Turkey likely to trigger a substantial sell-off in lira – Rabobank

“President Erdogan announced in a tweet that his country started a military incursion into Syria,” noted Rabobank’s emerging markets FX strategist Piotr Matys.

Key quotes

“In the worst case scenario – should the selling pressure on the lira escalate significantly on the back of a rising chance that the US Congress announces punitive measures against Turkey – Governor Uysal may have to seriously consider what his predecessor Cetinkaya (and before him Basci) had to do: raise interest rates to defend the lira.”

“Admittedly, it is too early to consider such an option as the lira would have to fall precipitously. That said, we had the opportunity to witness on Monday what sort of damage an inflammatory tweet from President Trump can cause when he threatened to “totally destroy and obliterate the Economy of Turkey.”

“Should US Congress decide to impose sanctions on Turkey for its military incursion into northern Syria, it is likely to trigger a substantial sell-off in the lira. Trying to convince President Erdogan that an emergency rate hike is required to reduce the risk of a currency crisis is likely to prove a tremendous challenge for Governor Uysal – a challenge that he is hoping that he will never have to face.”