Aug 13, 2018

How a Tweet Crashed the Turkish Lira.. and Affected the Rest of Asia

Picture from NY Times

The Turkish Lira crashed 20% within a few days and the fall was accelerated by a speech by Turkish President Erdogan and a Tweet from US President Donald Trump...

"There are various campaigns being carried out. Don't heed them," Erdogan said Thursday "Don't forget, if they have their dollars, we have our people, our God. We are working hard. Look at what we were 16 years ago and look at us now," Erdogan told supporters.

A few moment later, Donald Trump tweeted.

I have just authorized a doubling of Tariffs on Steel and Aluminum with respect to Turkey as their currency, the Turkish Lira, slides rapidly downward against our very strong Dollar! Aluminum will now be 20% and Steel 50%. Our relations with Turkey are not good at this time!

This chart shows the progress of the Turkish Lira in response to the Tweet.

It is a strange new world whereby Trade Wars are declared on Twitter and the financial markets are reacting to every move by the tweets from world leaders.

What are the Implications

We have seen similar episodes of Emerging Market hiccups from the 1997 Asian Currency Crisis where the origins started from Thailand, spreading to Russia and the 2013 "Taper Tantrum" where the tapering of the US Quantitative Easing shocked the Emerging Market, leading a short lived crash of stock markets around Asia and Emerging Markets. This is a similar scenario, though the situation is quite similar yet different since 2013.

The interest rate environment was pretty similar than and now: The USD and US interest rising and Emerging Markets that has borrowed heavily in USD (such as Turkey) saw their currencies and stock markets hammered by investors. The big difference this time round is that we have Donald Trump who is declaring a global trade war which aggravated the situation depressing the markets which he is targeting. It also does not help that relationship between US and Turkey has been declining over years as Turkey has been gravitating towards Russia's sphere of influence. On the bright side, it is unlikely that Donald Trump will target South East Asia nations which are also vulnerable and countries which was hit badly in the last Taper Tantrum such as Malaysia and Indonesia has shored up on their foreign reserves in preparation for a rising US interest rate. 

Having said that, the key concern is again on the issue of contagion. EU banks are one of the largest creditors to Turkey and their recent recovery from the EU financial crisis haven't put them on the best of condition as this moment in time. The trade war between US and China also increase the concern that a China slow-down will hit other South East Asian countries, on top of a rising USD and interest rate. It is like the perfect storm of combining the "Taper Tantrum" of 2013 and the "China Stock Market Crash" of 2015. If China and our neighbours get into trouble, Singapore will not be spared either.

The question is: Will the financial defense hold out to weather this series of storms? It is a development that investors will need to pay close attention to.

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