USDTRY: Why a decision on Brunson may be the market moving event this week?

Summary:

• A long awaited hearing will take place on Friday
• Erdogan says it’s up for a judge to decide over a future of the US pastor
• Lira is in a “make or break” situation, a decision could be a new trigger
• We present 3 macro charts explaining why Turkey really needs to calm markets, and now

The US pastor Andrew Craig Brunson has been in detention in Turkey for more than two years now but that situation could change soon and if it does, it could have a major impact on the markets. Let us first summarize where did the story start. Brunson has been linked by the Turkish authorities to opposition attempts to remove Erdogan in a 2016 failed coup. However, the US pressure on Turkey to release him has intensified only recently after the relationship between these traditional NATO allies deteriorated rapidly on issues like Syria, purchases of weapons and approach towards Iran. From the market’s point of view the US sanctions on Turkey were a tipping point in the FX crisis as it caused massive capital outflows from a market already fighting an uphill struggle against rising inflation, external debt and president questioning independence of the central bank.

Fast forward to present and we have USDTRY stabilizing just above 6.00, CRBT raising rates aggressively to fight inflation and Erdogan finally giving green light for these higher rates. But in order to calm the markets (which could eventually see USDTRY breaking the 6.00 barrier) relationship between the US and Turkey need to be repaired.

There’s a strangle calmness suggesting that something could be in the making. President Trump “promised” Turkey new tariffs each week unless Brunson is freed but he stopped short of actions for some reason. Then Erdogan said it was up to independent court to decide over the future of the pastor. Could we have a deal behind the scenes? One additional factor to consider is that the US Treasury could offer a much smaller fine on the Turkish Halkbank for evading sanctions on Iran.

Although we’ve seen some stabilization on the lira, Turkey is really on the edge and those 3 macro charts explain why:

1. Inflation surged to 24% in September, exactly the level of interest rates. Stronger currency would help bring inflation lower and eventually pave the way for lower rates, something Erdogan wants badly.
   
2. External debt has soared and if the Turkish companies are to refinance this pile, they need trust on foreign markets – otherwise a wave of bankruptcies could follow.
   
3. Years of too expansive policies have widened the current account deficit and Turkey needs external funds to cover it. If it shuts its access to capital markets, it will need to raise rates even more tumbling into a deep recession or follow Venezuela into hyperinflation.
   Source for the charts: Macrobond, XTB Research

So it could be really a make or break for the lira this Friday. USDTRY has consolidated in a triangle formation just above the key 5.95 zone. There’s really no more room in this formation so a need for technical impulse coincides nicely with Friday’s hearing.

USDTRY is in a triangle formation – will we see a break of the key 5.95 level? Source: xStation5