After two sets of emergency conferences with economic leaders and Turkey’s ebullient president, the Turkish lira dropped from a peak of 4.38 to the dollar to 4.23 this morning, before weakening back to 4.25. Turkey’s economic problems remain insoluble: The Turkish economy is a credit-fueled bubble with a growing current account deficit and dangerous dependency on short-term capital inflows and interbank borrowings.
As Swaha Pattanik wrote this morning at Reuters, “Turkey’s president is pursuing contradictory goals. Tayyip Erdogan wants to support the sagging lira. That would require measures to curb inflation and the current account deficit. However, his efforts to pump prime growth, especially before June elections, will achieve the exact opposite.”
The ruble is a different story. The political threat of sanctions against Russia caused the currency to collapse from a low of 57 to the dollar on April 1 to a high of 64 to the dollar on May 2. Since then it has rallied a bit, trading at 61.7 at noon EST on May 10. The ruble is a pretty good proxy for the price of oil (the r-squared of regression of the ruble on the oil price since 2010 is around 93%).
As the chart above shows, regression analysis of the ruble vs oil puts the Russian currency three standard errors away from the regression line. The currency’s fair value vs oil is around 50. Sanctions against Russia are not likely to continue (Washington wants Russia’s cooperation in keeping the Iranian genie in the bottle). They will be flouted in any event by the Europeans, whose trade with Russia is a multiple of Russian-US trade. The market vastly overreacted to US sanctions, and the ruble’s cheapness continues to represent a buying opportunity.