Turkish banknotes. Photo: iStock
As the lira continues to depreciate, Turks are increasingly feeling the economic strain of their declining purchasing power. Photo: iStock

Turkey’s currency is heading for its worst week in nearly five months, following distressing economic data and a credit downgrade last week.

London-based Rabobank strategist Piotr Matys was quoted in a Reuters report as noting that a wider than anticipated current account deficit this week triggered a spike in bond yields, which fed through to the currency.

One forex trader warned “historic record [lows] against the dollar could soon be tested.”

The unit dropped as far as 3.9005 vs the dollar, nearing its all-time low of 3.98. Against the euro, the lira hit a record low of 4.8238.

The economic alarm bells are ringing as Turkish-led troops are in a critical phase of their efforts to take the Kurdish-held Syrian city of Afrin. Turkey announced earlier this week that it has “encircled” the city, but a spokesman for the Kurdish People’s Protection Units (YPG) said that Afrin had long been surrounded. The source told Reuters that Ankara had been spreading false news to boost morale among troops.

Operation Olive Branch, as the Turkish attempt to carve out a piece of Syrian territory is known, will be entering its third month next week.

Some data on the plunging lira, courtesy of Bloomberg:

** That takes the currency’s weekly decline to 2.6%, set for its biggest weekly drop since November

* Carry trade positioning reached its previous peak, TEB strategist Erkin Isik writes in a note

** “The cumulative inflows since the beginning of 2017 reached $32bn, close to its previous peak at $34bn in mid-September 2017”

** “This suggests that the positioning is quite heavy, which lowers the chances of significant amount of inflows to reverse the depreciation in the currency”

* Bank of America Merrill Lynch suggests three emerging-market trade war strategies, including one being long Turkish lira vs South African rand

** Rand is highly correlated with Chinese manufacturing, while lira tends to benefit from a global slowdown due to reduced costs of funding, according to note written by strategists including David Hauner, Claudio Irigoyen and Claudio Piron

* In an interview with state-run TRT channel, Turkish President Recep Tayyip Erdogan’s senior adviser, Cemil Ertemsaid, says lira weakening is due to political reasons and there is “no need to panic”

* Yield on Turkey’s 10-year bonds rises 1bp to 12.81%, while that of 2-year notes drops 10bps to 13.83%, taking their weekly increases to 45bps and 37bps respectively