Financial markets traditionally get conniptions in autumn; but it is likely that this November is going to be particularly harsh, given the recent developments in the US
The US Federal Reserve has signaled that it will move ahead with balance sheet reduction and that interest rates will keep going higher, which in turn will cause the dollar to appreciate globally. Additionally, a significant crossroads regarding US tax cuts — which has affected both global and Turkish markets — has been passed. The US Senate took a significant step toward rewriting the tax code on Oct. 19 with the passage of a budget blueprint for 2018 — approved by a 51 to 49 vote — that could add as much as $1.5 trillion to budget deficits over the next decade. As such, the biggest obstacle in the way of US President Donald Trump’s planned tax reform has been overcome.
All of these developments will likely cause the dollar to rise against all the world’s currencies. In the third week of October, the weekly chart of the US dollar index approached the 94 area — its highest in three weeks.
Is Fed getting a ‘hawkish’ chair?
Stanford University economist John Taylor, seen as the most hawkish pick for the post, standing out as a likely candidate to chair the Fed has been a contributing factor in the increase in the dollar. US newspapers reported that President Donald Trump asked for consensus regarding the decision on who should lead the Fed from the GOP Senate leadership, who endorsed Taylor. The endorsement quickly had an effect: the 10-year yield moved higher following the appearance of the press reports and tested the important 2.42 percent level; its highest in the past six months. Similarly, the dollar rose in global markets, while developing market currencies slid in general.
Trump is expected to announce the new Fed chair prior to his trip to Asia, which will also include a visit to Beijing, in early November. Taylor and Jerome Powell, a current Fed governor, seem to be the runners up for the race, while Chairwoman Janet L. Yellen still might be nominated. The new chair will start leading the Fed in February 2018.
Dollar inches higher
But how do these developments occurring in global markets affect Turkey? The Turkish lira is one of the worst-hit currencies as a result of the strengthening dollar. The effect is so strong that the lira lost 20 kr — or 5.3 percent — against the dollar between Oct. 1 and Oct. 25. Over the same period, the lira slid 4.5 percent against the euro; trading at 4.07 against the euro; its lowest ever. There were two main reasons that irked the domestic markets behind the lira’s drip. One was the news that some Turkish banks face billions of dollars of US fines over alleged violations of Iran sanctions; although this was dismissed as false by the banking regulator BDDK and the Turkish Capital Markets Board (SPK). This, coupled with the news that the US authorities had rejected visa requests from members of a justice ministry delegation, has triggered a massive sell-off in lira. One should also consider that all these developments are taking place against the backdrop of increasing tensions with the US.
The effects of these developments could also be seen in the auctions held by the Treasury. Investors remained mostly uninterested in October auctions and the interest rates on bonds rose sharply in the secondary market. The yield on Turkey’s 10-year government bonds extended losses and reached 11.6; the highest in five years, while the compounded interest rate on the benchmark bond reached 12.5; its highest since 2009.
All these developments indicate that the November crashes, so common at this time of this year, will be even more painful than usual. Bankers note that in the coming period, the lira’s downward trend will continue.
