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The Kapali Carsi

Which Creates More Ambiguity; Central Bank of Turkey or Neighbors?

Here’s the inaugural post for my new project of letting in guest posts. I will usually have some short comments right below the guest posts, as well as a sentence or two indicating that this is a guest post: For example, if someone is saying that the Central Bank is doing great (and I would publish that if it is quality material, as I would want my readers to be exposed to different opinions), I wouldn’t want anyone thinking that I am high or anything:)

Tensions in the Middle-East seem to be waning, as a “venue” is finally set for nuclear talks between Iran and the West with rumors of possible compromises. Moreover in Syria, Assad promises yet again that he will take a step back, which provides immediate relief to Turkey. At any rate, even when a couple of days ago when bullets were flying past the border with Syria and the Turkish Prime Minister’s comments on the developments, local markets were relatively calm with respect to peers. Neither the slowly widening CDS spreads nor the limited upward movements in USDTRL volatilities imply that the market is pricing a clash. This has been the case for a while, looking at very simple measures year to date, ISE is still a top performer among CEE stock markets…

…and although somewhat weaker since end February, TRL is not doing so badly either:

I suspect foreign fund flows would also paint a similar picture. I can think of several reasons for this:

  • Investors are focused on global developments and liquidity.
  • From a game theoretic point of view, an escalation of the current situation moves all players to a worse equilibrium; therefore there shall be no conflict.
  • Market participants believe this is business as usual for Turkey, a country that has had to juggle a lot of balls in the Middle East since, well forever.
  • Or they believe they could backpedal quickly if a military conflict erupts and liquidity wouldn’t be a problem.

I think all of these are plausible, but if I had to, I would put my money on the third. No doubt that this is positive for Turkey, however Turkey’s image as a strong regional player is probably going o be tested again sooner than later as these conflicts are yet to be resolved.

What is quite interesting though is that, a decent probability of a military conflict creates less of an ambiguity in the minds of investors than a somewhat complex CB policy. This only goes to show(again) that investors(fast money) will go on until the music stops and that they care more about the tune that is playing rather than the possibility of sudden silence.

-Ali Gökhan is the acting economist at Eczacıbaşı Holding

I would argue that it is the first explanation. As The Economist was arguing in a recent piece (to be fair, I was one of the people who told them that, but they wouldn’t have written it if they hadn’t bought it), Turkey is a high-beta play, meaning that Turkish asset prices tend to show large moves with respect to market sentiment, i.e. do better than others when global environment is positive but underperform when it turns sour. Of course, there is also the issue of the Central Bank policies, which have been active in containing lira depreciation. Even though they contend that they don’t target the exchange rate, most market participants argue that they are intervening by tightening liquidity whenever the exchange rate basket (50% EUR, 50% USD), goes over a certain threshold. That threshold is supposed to be in the 2.05-2.10 range. If you want to decide for yourself, have a look at the graph of the basket and funding rate, which is basically the effective funding rate banks’ are facing:

Cool, ain’t it?:) Note the circularity: It could be that, the Central Bank is responding to volatility and lira weakness that its policies are creating in the first place, as Ali is implying…

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