Early in Thursday in Asia trading dollar/TL pair inched up to 5.44, with famed strategist Mr. Şant Manukyan forecasting next technical target at 5.52. While EM F/X had a poor day, in particular in LatAm, TL’s decline is probably not related to this trend. Central Bank bravely kept rates at 24%, signaling further monetary tightening if inflation conditions warrant such a move, soothing investors’ worries of political interference before crucial 31 March municipal elections. The reason behind TL weakness could be growing fears of another Father Brunson type of crisis between Turkey and US, this time kindled by Turkey’s S-400 purchase.
On Wednesday night, President Erdogan defied US warnings, calling the S-400 deal “sealed and done”.
Washington is ratcheting up pressure on Ankara over its decision to buy a Russian missile system, which was confirmed last month by Turkish President Recep Tayyip Erdogan. Senior U.S. diplomats held talks this week in the Turkish capital to lobby against the sale as Washington warns of “grave consequences.”
Deputy Assistant Secretary Matthew Palmer met Wednesday with senior Turkish officials in the latest diplomatic effort to block Ankara’s procurement of Russia’s S-400 missile system.
However, Erdogan reiterated his commitment to buy the Russian system. Addressing a rally Wednesday, he indicated interest in expanding the purchase to Russia’s more advanced S-500 system.
“I would hope that they [Ankara] reconsider this one decision on S-400,” U.S. General Curtis Scaparrotti told the Senate Armed Services Committee on Tuesday.
Ankara insists the S-400 offers the best value for its needs and poses no threat to NATO systems. Washington is offering an alternative to the S-400, its more expensive Patriot missile system, but negotiations with Ankara remain stalled over pricing and technology-transfer issues.
Analysts warn the consequences for Ankara, however, could be far-reaching. “If this purchase would go through, even beyond these military aspects, the escalation in Turkish-U.S. tensions would be significant in terms of affecting Turkey’s political risk, for the economy,” said Sinan Ulgen head of the Istanbul based think tank Edam.
The decision by U.S. President Donald Trump on Monday to include Turkey along with India in ending a preferential trade agreement is widely interpreted as a warning to Ankara. While the move affects just one percent of Turkey’s total exports, the Turkish currency fell sharply on the news.
“It is clear that the general tendency in Washington, D.C., is to punish Turkey for perceived misconduct, which remains a significant threat to the Turkish economy,” said Atilla Yesilada of Global Source Partners.
Washington has various means to inflict further pain on the Turkish economy. U.S. Treasury authorities are still considering imposing a potential multibillion-dollar fine on Turkish State lender Halk Bank after the conviction of one of its senior employees by a New York court for violating the United States’ Iranian sanctions.
Analysts point out that Erdogan probably will be buoyed by Trump’s silence on the controversy of the S-400 deal. “Ankara only cares about what Trump says for Ankara as only Trump is its interlocutor,” said former senior Turkish diplomat Aydin Selcen, who served in Washington.
The beginning of the end?
Ankara is not expected to make any concessions, though, before crucial local elections on March 31. Analysts say taking a hardline against Washington plays well among Erdogan’s supporters, adds VoA. However, TL is on tenterhooks, so is AKP. The economy is extremely vulnerable to another currency flare up, which would seriously damage corporate balance sheets just before 31 March quarterly tax and BIST earnings reports. Voters judge the well-being of the economy by the strength of the currency.
It is possible that Trump throws a last-minute life-line to his friend Erdogan, but if both sides continue the Chinese stare-down, the painful memories of last August’s F/X meltdown is still fresh in investors’ minds. The beginning of the end for the strong TL story may have started.