Turkish Lira Slumps as U.S. Threatens ‘Significant’ Sanctions

(Bloomberg) -- The Turkish lira led global currency losses and stocks slumped after the U.S. threatened to impose “large sanctions” if the nation doesn’t release American pastor Andrew Brunson.

The currency fell as much as 2.3 percent and the largest exchange-traded fund tracking Turkish equities sank after President Donald Trump tweeted that Turkey should free the “innocent man” immediately. The lira had gotten some relief yesterday when Turkey -- a NATO ally of the U.S. -- decided to place Brunson under house arrest after almost two years in jail.

Trump’s tweet followed an earlier threat by U.S. Vice President Mike Pence of “significant sanctions” on Turkey. The standoff is an unwelcome complication for the nation at a time when it’s grappling with financial stress that includes accelerating inflation, a widening current-account deficit and investor perceptions that the central bank isn’t doing enough to shore up the lira. The lira is this year’s worst performer versus the dollar after the Argentine peso, weakening almost 22 percent.

Turkey responded via a tweet from Foreign Minister Mevlut Cavusoglu. "We will never tolerate threats from anybody," he said.

The currency slid 1.9 percent to 4.8648 per dollar as of 5 p.m. in New York. The Borsa Istanbul 100 Index erased earlier gains, while Turkish state-run lender Turkiye Halk Bankasi AS sank 3.2 percent following yesterday’s 12 percent surge. The iShares MSCI Turkey ETF fell as much as 4 percent before paring losses.

Here’s what analysts and traders say:

Cristian Maggio, head of emerging market strategy at TD Securities in London:

• “I think the U.S. is frustrated enough with Turkey’s government behavior of keeping foreign citizens at ransom for political reasons. I think Turkey should listen to the last call before sanctions are really implemented, it’s negative until then, I think.”

Nigel Rendell, a senior analyst at Medley Global Advisors in London:

• “Undoubtedly, a negative impact on Turkey. This kind of ‘shotgun diplomacy’ by VP Pence only escalates the dispute surrounding Brunson."
• "Given that Brunson has just been moved from jail to house arrest a more softly, softly approach would be the best way to play it. Immediate sell-off in the TRY highlights the risks to Turkey of continuing strained relations with the U.S."

Delphine Arrighi, a portfolio manager at Old Mutual Global Investors in London:

• “I think headlines on the case yesterday gave the perception that relations between Turkey and the U.S. were improving."
• "Today might show they are still more strained than thought and could add another layer of uncertainty for Turkish assets on top of an already very uncertain economic outlook.”

Win Thin, Brown Brothers Harriman and Co. chief emerging-market strategist in New York:

• “This pastor was freed from jail and put under house arrest, which led some to believe US-Turkey relations were improving. Now, it looks like relations remain bad."
• “VP Pence is playing hardball here. I think Turkey was hoping that moving the pastor to house arrest would ease tensions with the US but that clearly is not the case.”

Ulrich Leuchtmann, Frankfurt-based head of currency strategy at Commerzbank AG:

• “The U.S. administration’s policy is obviously very volatile. We saw that on many fields."
• The risky isue with TRY is: it is already quite vulnerable after previous weakness and the recent CBT decision. The Turkish side has proven to be pragmatic in similar cases with Germans. Therefore I would not expect massive market reaction if TRY were not already so vulnerable. The point is: the Turkish side is pragmatic, but such a process takes some while. The risk scenario would be a market that gets overnervous in between. But not my main scenario.”

To contact the reporters on this story: Aline Oyamada in Sao Paulo at aoyamada3@bloomberg.net;Selcuk Gokoluk in London at sgokoluk@bloomberg.net

To contact the editors responsible for this story: Rita Nazareth at rnazareth@bloomberg.net, Alec D.B. McCabe

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