SINGAPORE: The risk of US sanctions over Turkey’s purchase of a Russian defence system has clouded the lira’s outlook for most of the year, but it still managed to give the currency a jolt when the threat was reiterated.
The lira sank as much as 1.5% against the dollar after people familiar with the matter said the Trump administration is weighing three sanctions packages to punish Turkey. One of the packages would all but cripple the nation’s economy, the people said, and that’s probably behind the knee-jerk reaction today.
Still, “the news should not be a surprise as the US has warned about this previously,” said Mitul Kotecha, a senior emerging-markets strategist at TD Securities in Singapore.
Concern over the implications of the Russian S-400 missile-defence deal has weighed on the lira for months and contributed to its 10% loss this year, the biggest depreciation in emerging markets after Argentina’s peso.
The risk of sanctions may have already been priced into a large extent. While the premium options traders pay to sell the lira using one-month risk reversals has sunk from a high in March, the contracts are still up about 60% since the start of the year.
They were trading at 5 percentage points on Wednesday, more than double its nearest rival, the South African Rand.
The lira was 0.4% weaker as of 10.23am in Istanbul at 5.8494 per dollar, pushing the dollar-lira cross toward its 50-day moving average. The nation’s main stock index reversed early losses to gain 0.5%, poised for the highest level since April 30.
The lira’s decline is “not a huge movement in the bigger scheme of things,” Mingze Wu, a foreign-exchange trader at INTL FCStone in Singapore. “Ultimately Trump threatens a lot of things but delivers very little,” he said, citing threats made against Mexico and Canada.