1/n
Turkey markets thread

1) Turkey isn't blowing up, but the lira is. This is a historic moment for old & new observers. Normally FX devals come with local market stress but Turkey equities have been booming, and CDS/ JP benchmark spread is far from distressed.
2/n
The lack of notable local stress is due to a significant reduction of foreign players in both the equity and bond market. This has really limited the contagion story. A few years back the idea of USDTRY at 13-handles would've been a chat about EM systemic risk. That's gone
3/n
FX implied yields aren't going crazy either (vs CB rate). This is quite incredible given that implied yields were much higher during the Pastor Brunson event, when the CBRT hiked to 24% (900bp away). The market doesn't believe major hikes are coming, given Erdonomics.
4/n
Swap rates are responding, but again, much lower than one would think, given how the lira is trading.
5/n
What happens next?

The current Turkey situation is relatively unique. Local macro is generally ok; credit growth isn't crazy, no major BoP pressure, FX deposit growth isn't alarming, etc. If you weren't looking at USDTRY, you wouldn't necessarily think there's a crisis
6/n
I think a continued lira slide results in a policy rate u-turn and another round of firings. That's the playbook we know. I don't think anyone has a handle on the "FX pinch point" beyond which things blow-up; some time ago a 7-handle figure was mooted but it was clearly wrong
7/n
I'm not sure the market believes a systemic event (credit event) happens unless locals completely lose faith in the currency. Given the possibility of a fairly quick decision to hike a ton, local capital flight can be kept in check (compensated).

We'll just have to see

END

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