Tag Archives: international payroll

Presidential Showdown: Trump-Erdoğan

Discussion and analysis by Grace Gliksten:


A month of souring relations with the EU has ended with Turkey in a stalemate with the US following a mutual suspension of visas. The Turkish Lira has unsurprisingly been hit harder by the event than the US Dollar which, surprisingly, still showed a perceptible weakening.  


Following the arrest of Metin Topuz, a Turkish employee of the US embassy, last week, relations between Turkey and the US have worsened, precipitating a vicious tit-for-tat reciprocity. While the Turkish government has provided no information concerning the arrest, the Turkish media has conjectured that Topuz was arrested for ‘facilitating the escape of known Gulenists’, followers of Fethullah Gulen whom Turkey accuses of being behind last year’s coup attempt. Visas were suspended mutually between the two countries despite the healthy diplomatic stance that both leaders displayed regarding their mutual foreign policies last month. The US ambassador has insinuated that certain Turkish officials were trying to unsettle relations between the countries while the Foreign Ministry in Turkey has claimed that the suspensions have shown ‘unnecessary victimisation’.


Relations between the two countries have been tense since the Obama administration and have slowly become deeper, despite the initial assurance from Erdogan that mutual cooperation could flourish. Erdogan believed that, under Obama, the US was too supportive of the Syrian Kurds, whom he believes to be an extension of the Kurdistan Workers’ Party, or PKK, which both countries have designated as a terrorist organisation. Moreover, the Turkish President was aggrieved by the failure of the US government to extradite Gulen upon Turkey’s request, despite US officials claiming the evidence provided by Turkey to be insufficient.


Whilst being marked as one of the worst performing currencies of 2016, the Turkish Lira found itself in new territory, strengthening against the US Dollar for seven months in a row this year. The Lira increased by 8.49 percent between February and August 2017 for the first time since the currency became convertible in 1989, likely on the back of tightening monetary policies that signalled the sensibility of the Central Bank of the Republic of Turkey and an increased reward for investment. The Lira began depreciating against the US Dollar in September after Angela Merkel’s calls for an end to Turkey’s membership bid; a trend also reflected within the Euro and Pound Sterling. Talks between the EU and Turkey have been left frozen for some time now, with EU officials growing worried that Erdogan’s Turkey is becoming more and more authoritarian under his rule.


Two year graph of USDTRY, GBPTRY and EURTRY: Exchange rate of the Turkish Lira in US Dollars, Pounds Sterling and Euros respectively in the medium-long run. The Turkish Lira is shown to be at seven-month-long highs against the US Dollar between February and August 2017. Despite periods of Lira strength against the Euro and the Pound Sterling, a similar, elongated, trend cannot be found.


The EU is, however, stuck between a rock and a hard place when it comes to rejecting Turkey’s membership bid. The EU has a crucial refugee deal with Turkey whereby Turkey has helped stem the flow of refugees trying to enter into Europe since the beginning of the crisis in 2015. Hosting almost 3.5 million refugees, surpassing any EU member state and accounting for almost three times the number in Germany. Erdogan’s apparent commitment to his agenda is causing the EU further concern. The referendum in April, won by a narrow 51.4 percent of accepted ballots cast, granted Erdogan new powers, adding to fears that Turkey will snowball into authoritarian rule. This includes the power for the president to intervene in the judiciary and the scrapping of the job of prime minister. The new system could see Erdogan in office until 2029.


The Lira hit 12-week lows this week against an already appreciating US Dollar. The Lira depreciated by 3.6 percent against the US Dollar and by 3.88 percent against the Euro on Sunday night. The significant depreciation was caused by to the combined effect of strengthening the perception of Turkey as an undemocratic and insular nation, as well as a pricing in of lower future demand for Turkish Lira by US citizens. The US is the fifth biggest market for Turkish exports, while Turkey only makes up 2.1 percent of US exports. Although minimal, there was a small effect on the US Dollar, shown in the differential between Lira crosses other than the Dollar and the USDTRY spot exchange rate. This can be attributed to two factors. Firstly, the demand for US Dollars in Turkey will have decreased due to the mutual visa suspension. Turkish nationals formerly travelling to the US may no longer need US dollars, weakening demand.  Secondly, there will be a natural, albeit small, effect on confidence within the US Dollar, because the diplomatic actions between the US and Turkey are mutual; just as US visas are to be withheld from Turkish citizens, so too are US rights to Turkey.



One week graph of USDTRY, GBPTRY and EURTRY: Exchange rate of the Turkish Lira in US Dollars, Pounds Sterling and Euros respectively in the short term. The amplitude of the US Dollar change is smaller than its Euro and Pound Sterling counterparts.


The relative importance of the Lira to the Dollar is minimal, shown by the negligible percentage change between the US Dollar and the Euro.  Analysing the net effect of Dollar weakness stemming from Turkish sanctions against US visitors is futile because of both the trading and political significance of Turkey to the US. As a major international reserve currency, a mark of stability, and a conduit for international trade, there is ample demand for the US Dollar outside of Turkey. As the same can’t be said for Turkey, the Lira took a far bigger hit.

SGM-FX View of london

Brexit under May


Discussion and Analysis by Charles Porter:


The original Brexit vote was motivated by a dissensus within the incumbent Conservative government under David Cameron; at least that is the public and academic consensus. I argue that this suggests that the delivery of a final secession, and the eventual form that Brexit takes, will be definitive and complete. Whilst the media and critics may fear and criticise Theresa May’s commitment to a soft or incomplete Brexit, even her conjectured ambivalence about reversing the process entirely, the composition of the Conservative party is likely to force her hand to abide by the will of the Leave vote.


The market’s short-medium run consensus is bearish for the Pound, my view also remains this way. However, this article aims to uncover why this trend and expectations for its continuance might be over exercised and the bearish market over anticipated. Whether the desire for the United Kingdom to exit the European Union has been evolving and suppressed within the British public ever since 1973 is inconsequential. What matters is that the Brexit mandate is the democratic consequence of the June 2016 referendum; an event that was facilitated at this specific time by the internal dynamics of the incumbent Conservative government.


David Cameron’s Conservative party was staunchly divided on Brexit. This was not a new tension, or, for that matter, even one that has disappeared following Cameron’s resignation. Conservative MPs are almost equally divided on the matter of Europe. Whilst this numerically resembles the referendum divide, a geographical, voting result, and demographic analysis reveals that parliamentary representation does not correlate with public voting behaviour. Critically, therefore, the Conservative party is constrained.


To unite his party during the 2015 election campaign, Cameron included the pledge within the Conservative manifesto. There were additional reasons for this inclusion. For example, the wider conservative party feared a defection of voters and MPs alike to the United Kingdom Independence Party; UKIP. Therefore, in an appeal to the median voter and to develop the voter base during the referendum, the party offered a referendum, despite formally voting to remain. However, internal party dynamics were overwhelmingly responsible for the referendum opportunity, with a breakup of the party and defection possible had Cameron not conceded to a referendum. Critically, I argue that this division within the Conservative party will, once again, safeguard the deliverance of secession. This is because without a significant reshuffle of Conservative representatives, Members will assert pressure upon the leadership and cabinet to deliver.


This offers a critical market insight: despite public and media fears of a Brexit U-turn, so long as the Conservative party is the predominant government, a Brexit is almost a foregone conclusion. Therefore, upon the realisation of this conclusion, the uncertainty and risk that is priced within the foreign exchange market surrounding the secession negotiations and final exit arrangement could be alleviated. Uncertain effects surrounding the British political economy deteriorate the value and purchasing parity of the Pound Sterling. A potential for a partial revaluation, ceteris paribus, once this fact establishes itself is a strong possibility.


Ultimately, therefore, the Pound could be valued slightly higher than its respective intraday level by pricing out the uncertainty risk of a retrenchment from Brexit and a deliberate bad deal. As mentioned above, this does not reverse expectations of a bearish Pound Sterling. The absolute risk surrounding Brexit and the final exit deal still remains. Instead, what is overpriced, is the risk of a no B-Remain, a U-turn and the political and social fallout from this event.


This leads to the conclusion that despite rightful concern about Brexit negotiation progress and UK party politics, the constraint upon the government to execute a satisfactory and decoupled Brexit is stronger than one might realise at first glance. Following the devaluation of the Pound at market upon this morning, when Sterling lost more than half a percent against the Dollar and Euro, this message is increasingly salient.


While there are qualifications to this, not least the unstable absolute mandate of this Conservative government thereby raising the efficacy of defections, the Parliamentary and whip system can be supposed to offer some constraint upon Commons voting behaviour amongst Remain-inclined Members. Therefore, the only real threat to the foregone conclusion of a Brexit is a second referendum; a measure that the composition of the incumbent party should, once again, preclude. Members of the party would be constrained to follow their public mandate, however, have considerable power over whether to allow that mandate to manifest by blocking a referendum bill in the Commons.


In summary, regardless of your opinion on Brexit; good bad, beautiful or ugly, the UK’s secession from the European Union is almost inevitable. Outstanding circumstances outside the realm of normal governmental action and party politics would have to prevail with remarkable secrecy. The argumentation behind this conclusion further suggests that risk within the Pound Sterling, specific to Brexit, is overvalued. Therefore, the Pound Sterling may appreciate upon the realisation of the government’s real, de facto, commitment to leaving the Union. The Conservative party conference, that concluded yesterday, developed even more weight to this argument; Brexit is the only plausible option within the UK’s incumbent centre-right party.