(14 MAY 2019)DAILY MARKET BRIEF 2:TRY under renewed pressures amid trade war, election re-run

Things have not taken the turn expected by investors. The rise of US trade duties on Chinese products pushed Chinese authorities to take a similar step and impose additional tariffs ranging from 5% to 25% on a total of $60 billion-worth US products such as natural gas, vegetables or cosmetics. Consequently, risk aversion rises, thus increasing demand for safe-haven currencies (CHF, JPY) at the expense of AUD, NZD, SEK, NOK or EM currencies such as the Turkish lira. Yet risks of an open trade war between both nations remains very unlikely, as the long-awaited Trump-Xi meeting is supposed to take place during the 28-29 June 2019 G20 meeting in Osaka. There is therefore more to be expected from both sides in the coming weeks when it comes to negotiations.

The recent developments have maintained the Turkish lira under heavy pressures, despite the Central Bank of Turkey (CBT) attempt to close the gap in Turkish lira by suspending funding of its 1-week repo rate (24%), and so forcing financial institutions to finance at a higher overnight rate (25.50%). Furthermore, a re-run of mayoral elections in the capital is not helping. The release of current account balance, although presenting a narrower trade deficit gap ($-0.59 billion), does not provide much of a sign of optimism as both exports and imports are in a downtrend, suggesting a lower growth outlook. Accordingly, we can expect the CBT to maintain more stimulus in this backdrop, which should prompt further lira weakness.

Currently trading at 6.0658, USD/TRY is head along 6.1295 short-term.