Since I have gotten a million requests for interviews about the TRY today, I am writing down a few basic points here, that attempts to summarize the situation in the most basic way...journalists: feel free to quote.
1/ The Turkish lira has been weakening steadily since 2013 (the famous taper tantrum). Even before today's 10% decline it had lost 80% of its value vs the USD over the period. The new thing is the amazing speed of the depreciation.
2/ Why are FX losses accelerating? In currency markets, nothing is simple. But sometimes it it. The Central Bank of Turkey cut interest rates from 19% to 15% in recent months, and the currency collapsed.
3/ The rate cuts are happening while domestic inflation are going higher. So real rates are collapsing.

(and Turkey is not the US, so investors do not love negative real rates so much, since it is a more risky investment)
4/ The rate cut is also happening while the Fed is tapering (and arguably getting close to raising rates), and while other EM central banks are hiking aggressively.

For example, Brazil's central bank has hiked from 2% to almost 8% this year.
5/ And inflation expectations are going up. Chart here shows inflation expectations for 2022. Moving from 10% in the spring to 15% now (and this does not yet cover all the inflation that will come directly from the currency now collapsing, pushing up import prices)
6/ What can Turkey do? Normally in a currency crisis, it is the time to stabilize matters, by using currency reserves to support the currency.

But Turkey does not have a lot of liquid reserves left (do not look at the official reserves stats, they are not representative)
Another policy option, normally, is to ask external friends, with money, for help. But who is Turkey going to ask? They do not have so many friends abroad.
And there there are so-called balance sheet effects. Turkey has a lot of USD debt.

If local borrowers have local currency revenue, and USD debt, it can become a real problem. This is often what makes currency crisis so painful (as in the Asian crisis)…
Emerging markets had a strong bull run from 2003 to 2013. Since then, it has been more tricky. But we have had few real blow-ups / currency crisis. If local economic management is sufficiently bad, then maybe the 1990s story will re-appear, with old fashioned EM dynamics in play.
On top of that, there is the Fed dimension. What happens to EM, if the Fed really moves to actually tighten in 2022? It is worth thinking about, especially if you are risk manager.

I will leave it at that. END.

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More from @jnordvig

20 Oct
It is exactly a month since Evergrande was the only thing anybody could talk about.

Hence, it is a good time to recap market dynamics since Sep 20.

Where is the contagion sticking, and where have we recovered (many places, but not all)

First, the Chines currency has substantially OUTPERFORMED over the past month. While the EUR and the JPY are down 2-4% vs the USD, the CNY is up around 1% against the USD.

This fits with how they want their currency to behave 'reserve currency like'.

Second, while a crisis normally generates yield declines in major markets, this has NOT been the case in China. Chinese 10Y rates are UP over the past month, as expectations for mon easing has been disappointed (and in sympathy with the global trend). Image
Read 13 tweets
19 Oct
Since the Fed is in play, understanding what they are saying matters more than normal

But it is not always easy

(if anybody can help me out with today's Waller comments, I would appreciate it..)
Waller was pretty clear is the his central case is a decent gap between end of taper and rates lift-off:
But when he talks about risks to his central case, he first mentions a test around the 'remainder of this year'
Read 5 tweets
17 Oct
There is a lot of debate about these various measures of inflation expectations. And it is worth thinking hard about their signaling value, including what is the process behind generating the forecasts

(I used to submit them...)
It seems to me, that the key point is, that there may be a break in the process for making such forecasts.
- From simply using the target as the anchor, as opposed to a model.
- To having your econ view potentially override the target
Around the world, we are seeing (economist) inflation forecast starting to really break higher. But mostly for 2021 and 2022, while in G10 (they are still anchored in 2023).
Read 6 tweets
17 Oct
This is not a normal cycle...

I have argued this for many many months now (looking at economic trends).

And NOW monetary policy cycles are starting to look highly unusual too (central banks and yields curves are on the move)


It is not just in the US, that things are suddenly moving VERY fast on the monetary policy and interest rate pricing front.

In the UK, short rates (2y) have moved 40bp in a month. It is the fastest repricing we have seen in more than a decade. Yes, WOW!
In some G10 countries, we have gone from thinking about multi-year forward guidance (and QE expansion), to thinking about a rate hikes.

Norway and New Zealand have already hiked, and in the UK a rate hike next month is being debated.
Read 13 tweets
12 Oct
The dollar is not what it used to be.

A specific example: the correlation to oil...

(short THREAD)
There used to be many arguments why the dollar was NEGATIVELY correlated to oil

1/ The US is more energy intensive
2/ Petro-dollar flow supports other currencies
3/ Other central banks are more sensitive to headline inflation (=energy) than the Fed
And this is how it looked like pre-GFC, EURUSD and oil prices looked nearly identical on the chart (I have admittedly picked the most extreme period, around 2007).

In other words, the USD used to be strongly negatively correlated to oil prices.
Read 9 tweets
6 Oct
Is it a coincidence that bitcoin has broken $50K at the same time as the news media is full of stories about a potential US default as a function of failure to raise the debt ceiling in October?

The chart shows that $BTC (white) spiked exactly as US T-bill yields (yellow) spiked
That is, bitcoin prices moved sharply higher exactly at the same time as short-dated T-bill yields (those maturing after October 18, when Yellen has said Treasury funds will run out) spiked, and embedding a 'default premium'
We cannot prove anything statistically in a sample of one, and if we look at how the dollar is trading, we do not have a global USD decline (the dollar has generally been firm in recent weeks), so it is not a slam-dunk conclusion.
Read 9 tweets

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