With no important economic news on the horizon and summer trading still ongoing, market’s attention turned to Turkey. The emerging markets drama continues, with the Turkish Lira (TRY) sinking to record-low levels.
With the Fed in the United States running a double tightening cycle (raising the federal funds rate and shrinking the balance sheet at the same time), it was only a matter of time until emerging markets saw the pressure. If you come to think of it, it is no wonder, and no one should be surprised by the recent events.
Cheap dollars provided by the Fed in four rounds of QE (Quantitative Easing) were tempting, and emerging markets loaded themselves with loans without thinking of how will repay them on the next crisis. Fast forward few years and here we are with a full swing crisis, on two fronts: politic and economic.
An economic crisis because the Fed’s tightening creates a shortage of dollars on the international scene. Suddenly, countries like Turkey face the need to repay the loans in dollars, but the dollar became scarce. Hence, they’ll cost more, further weighing on the emerging markets shoulders.
Coming after an electoral battle, Erdogan gain even more control over Turkey. But market forces are uncontrollable once the all-mighty dollar starts squeezing higher.
The political raw with the United States over the American pastor came to push the markets over the bring. Last week the Turkish Lira sank to unprecedented levels, beyond the point where a central bank interest rate hike can help.
In its race to the bottom, the TRY even outpaced the Argentinian Peso, another currency facing an existential crisis.
Will the international financial markets face a spillover? With many European banks exposed to Turkey, it may be that summer trading will end faster than usual this year.