TL’s baptism by fire begins early

TURKEY - In Brief 18 Sep 2017 by Atilla Yesilada

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Fed’s FOMC decision created some unease in EM currencies, as the Dollar Index and U.S. long-yields rose somewhat, but the TL took a big hit, while the Istanbul Stock Exchange, now renamed BIST-100 Index substantially decoupled from peers in a negative way. Turkey’s exaggerated response to Fed concerns is attributed to its high Beta to EM, as well as to unscheduled military maneuvers at the Iraqi border to serve notice to Iraqi Kurdish leader Barzani that the independence referendum scheduled for 25th of September will have consequences. I suggest while these two factors may be the catalysts, there are deeper reasons for TL weakness, which may not be easy to reverse. Not only Ankara, but U.N., Baghdad and Iran are also worried about the referendum to be held in the Kurdish Federal Region. Pro-independence votes are forecast to win, but president Barzani is not expected to announce a decision to secede. His game plan is to gain an ace card to bargain with Baghdad to restore financial aid and to stem potential aggression by Shia militia after the inevitable demise of DAESH. Ankara’s concerns are easy to understand. The country has a very large (estimated at around 10 to 15 million) Kurdish minority, which is restive, while it combats pro-PKK Kurdish militia in Syria named PYD-PYG. Kurdish secessionist-independence movements are threats to national unity in Syria, Iraq, Iran and Turkey, period. If “Kurds” are the sole cause of TL weakness, expect more bad news, because Erdogan convenes the top policy-making body of the nation, the National Security Council, on 22th of September, which can be expected to issue more ultimatums to Barzani. While there is a smidgeon of a chanc...