Today’s Trading Playbook
KEY THEMES
Over the last couple of days, the Turkish lira journey to the downside accelerated in a dramatic fashion, impacted by a set of interest rate cuts over the course of the last few months. Right now as we speak, the FX rate of the Turkish lira against the USD is 16.4, while FX rate of the Turkish lira against the EGP is 1.04.
So, are we in danger of any sort of harm spillover? We could be, but not necessarily. First, the reason for such drastic weakness in the lira is Turkey's very loose monetary policy stance. Indeed the main target by such policy is to spur the performance of Turkish exports. Second, Turkey's external debt structure is more on the short term.
We believe it is highly likely that investors will treat EMs on a case-by-case basis in the fall-out of Turkey's latest currency movements. In this sense, we think the EGP exchange rate may be witnessing a bit of more flexibility in its movements compared to the last three years.
Furthermore, Turkey is a very important trade partner to Egypt. You can bet that if the current situation persists, Egyptian exports, and services in particular, will face a tougher regional competition out of Turkey. On the other hand, Egypt’s annual imports from Turkey is around USD3bn. Main imports include iron and steel, mineral fuels and mineral oils, machinery and appliances, vehicles and their parts, plastics, and carpet and other textile floor coverage. The weakening of the Turkish lira could stimulate some sort of an imports attack, potentially impacting Egypt’s trade balance.
So in short, if the situation in Turkey continues, it is not necessary capital flights that will be after us. However, the consequential tougher competition, especially in tourism, alongside any trade balance repercussions can stand out as more quantifiable threats.
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