Brexit revisited and elections

Brexit is an unwelcome topic for many people. Thankfully there are no more trade talks or end of year deadlines for investors to worry about. That said, Brexit still casts various shadows. The latest has prompted the UK to send a gunboat or two to protect the island of Jersey from French fishermen. By the way, the fishing industry’s size is just 0.1% of the economy. So far this year, Brexit shadows have been most obvious in the politics of Northern Ireland and specifically the issues that have been thrown up as a of the Northern Ireland protocol. While this proves that Brexit is still creating friction, Northern Ireland politics have tended not to create much of a distraction.

Also, the UK went to polls for local and regional elections, including parliamentary elections in Wales and Scotland. The elections in England are mostly local. That said, the Labour party faces a key test in the Hartlepool by-election. This has been a Labour seat for decades, but recent polls suggest heightened risk that it could flip. This would follow the Tory party’s successes in the December 2019 general election which brought wins for PM Boris Johnson in a swathe of northern seats that had been held by Labour for decades.


Our Turkish lira fair value has been unchanged at TRY 7.50 since the middle of last year, when we lifted it from 6.30. We have now decided to make another adjustment to reflect the evolution of the balance of payments. We are lifting our fair value to TRY 9.50. There are two drivers. First, the current account deficit looks to be somewhat wider than we had anticipated. We now project a deficit of 4% of GDP this year, up from 3% a few months ago. Second, foreign capital inflows are quite a bit weaker than we anticipated at the start of 2021, with sizable outflows since mid-March. We think this combination likely implies a weaker equilibrium level for the lira, which will help lift export volumes and the outlook for the current account. The lira is among the weakest EM currencies globally in real effective terms.
-Robin Brooks, economist, IIF, May 6


Turkey’s Central Bank didn’t spring any surprises and left its one-week repo rate on hold at 19% today. While the accompanying statement maintained a hawkish tone, policymakers left the door open for the start of an easing cycle over the coming months. The decision to leave policy settings unchanged was expected by all analysts, including ourselves, polled by Bloomberg ahead of the meeting. Central Bank governor, Sahap Kavcioglu, started to lay the ground work for an easing cycle at his first MPC meeting last month and the fact that the lira strengthened a touch following the decision suggests that some investors had factored in the possibility of a rate cut today. Since April’s MPC meeting, Turkey’s recovery has taken a turn for the worse.

– Jason Tuvey, economist, Capital Economics, May 7

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