Turkey - Das Boot.


Turkey has shown decisive resolution and a strong firm hand in order to guide the market back to more sensible levels and punish the evil speculator. Well, that's what the statement would sound like if it came from the citadel of Brussels or Frankfurt. TMM praise the decisive action and look forward to similar action from Brazil, but the question is "Is it enough to turn the tide". We have seen this battle fought over history and the ghosts of Thailand, Argentina and all the other fatally pegged currencies still stalk the poppied plains of FX. TMM in particular remember their own experiences of the Sterling crisis of 1992 when interest rates were being cranked up in units of two in as many hours and we know what happened next.

The point then, as it is now, is if you have a full blown attack on your currency raising rates to the likes of 12% in the short term really doesn't deter a speculator who is having to fund at 1% a MONTH to play potential upsides of 3% or more per DAY. Of course the idea is that forward rates on FX move making it more expensive to sell currency forward.

But forwards are lower today on most periods as the idea of relief brings implied yields lower despite the actual hike in rates (1 month forward points below).



It's actually cheaper to speculate against TRY this morning than it was yesterday, not only as Spot is lower but the forwards are better too. So though rate rises have effectively kneejerked sentiment they have done nothing to actually make the trade more expensive.

This is worrying as it looks as though they have gone "all in" with the rates weapon hoping for shock and awe but so far today we see spot moving ominously back towards where it started and the forwards looking cheaper.



The speculator has just climbed out of the light scattering of rubble, is dusting himself off and probably thinking "Well if THAT'S all they can do then .."

Which to be honest is worrying for TMM as we played the Turnaround Tuesday idea and were feeling pretty happy. But we are back to sentiment. Long term the demise of the Turkish lira is probably a good thing (yes we are still bitter about prices charged in some Turkish beach resorts), adjustment in currencies is a hugely important tool and perhaps their effects should be worn as an inevitability that will only appear through other channels anyway if FX moves are attempted to be contained (growth reduction via higher rates counters c/ac improvements through FX falls).

But it's sentiment. The world was looking for Turkey to take action and the effectiveness of their actions is probably going to be seen as a bellwether. As the markets are so prone to do, for ease of trading, they tend to pick one stress price and use it as the barometer of fear. European crises saw PIGS 10yrs, basis spreads and a plethora of "charts du jour" to trade off. If anyone needs the same today then we suggest that the pressure gauge to watch will be the simple USDTRY and it's creeping its way ominously back to the 2.26 level it was at pre rate hike.

 Erdogan and Basci are currently living out the scene from "Das Boot" when it is under attack, waiting in a creaking hull with worried eyes on the pressure gauges.




Where does this leave us? On a global picture we aren't too fearful but the short term sentiment associated with selective EM is intense, so we have about-faced our confidence of yesterday, chopped bounce longs and are playing the short side in global risk today. Hardly long term Macro but you've got to swing with the info and try and make a buck!


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CV
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January 29, 2014 at 12:08 PM ×

Yep TMM, despite my overall fondness for the long US 10y/long EM trade it is beginning to look risky. We are generally holding up alright here with EM, but but ...

That was a wild move by Turkey and could create a nasty precedent for "intervention". I mean, if EM have to start implementing 600bp tank shell hikes to stabilise currencies, it is obviously pretty close to the definition of "game over"

Claus

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SouthSeaCo
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January 29, 2014 at 1:35 PM ×

That das Boot analogy/clip is fantastic. Well played sir.

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Skippy
admin
January 29, 2014 at 2:26 PM ×

A lot of technical damage done to the Spoos. The rally back to kiss the 55 day, then reversal. Can QEen Yellen and the Beard's last stand save them?

How price responded to news in FX clearly very bearish.

Great post

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Leftback
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January 29, 2014 at 4:20 PM ×

Hopefully Turkey will not end up like the Hunt For Red October, TMM, where the Russians end up being destroyed by their own torpedo... this is pretty much how our fixed income hedging has turned out of late.

The main thing speculators have to fear would be other (unnamed and not-to-be-named) CBs stepping in to scoop some TRY in a sort of "you scratch my back, I'll scratch yours". There was clearly a bit of this going on during the Euro crisis.

Mr Market clearly unhappy today, awaiting later hand relief from Dame Janet amid dovish language about "Fed may vary pace of tapering".

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Leftback
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January 29, 2014 at 6:00 PM ×

Tale of two tapes likely today. Two Tiny Tapers are already priced in, so we'll get that little 5 minute oscillation in rates and spoos where the machines hunt stops, eventually followed by a bit of mean reversion.

So we would say, sell US fixed income and go long the spoos, for a trade. 10s retrace to 2.76-2.80% and SPX retrace to 1813 or 1820.

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