Turkey: Geopolitical Risk Will Drag On TRY, But Repeat Of 2H/2018 Looks Unlikely

Forward-looking updates from GeoQuant's high-frequency political risk intelligence platform.

Following the launch of Turkey's "Operation Peace Spring" in northeastern Syria, Turkish Geopolitical Risk -- correlated at r = +0.79 with USDTRY since 1 Jan 2018 -- will continue to increase through this week, maintaining pressure on the Turkish lira, with our default 26-day running correlation moving into positive territory. That said, note below that Geopolitical Risk, while clearly elevated, is projected to stabilize later in the month. Remaining below recent peaks from the summers of 2018 and 2019, when U.S. sanctions pressure was highest. As such, we do not project the kind of sustained geopolitical pressure on the TRY -- including U.S. sanctions on Turkish officials and/or increased tariffs -- that occurred in summer 2018, exacerbating a currency crisis. Indeed, by extending the running correlation between Turkish Geopolitical Risk and USDTRY from 26 days to 60 days, we see that the relationship actually remains negative in October. Relatedly, while Turkey's ongoing operation in northeast Syria has pushed our measure of Turkey-Syria Contingent Risk to an all-time high, this trend is projected to decline (albeit slightly) going forward, supporting a decline in Geopolitical Risk later in the month.

See the full analysis on the app.

Poland's ruling Law and Justice Party (PiS) was well positioned heading into Sunday's general election: strong economic performance has held Government Risk down, while the party's platform combining increased social spending paired with opposition to minority protections and non-European migrants has secured its re-election. Poland's open-list PR electoral system complicated matters for the ruling party, but PiS overcame electoral coordination challenges to secure a legislative majority. With PiS again leading government, rising Socio-Economic Risk -- as social polarization has historically been the ruling party's cudgel against its opponents -- could move from tailwind to headwind in the next term. As conflicts with Brussels fester, Ukrainian inward migration subsides, and the global economy slows, PiS will not have a helpful economic wind at its back in the term ahead.

President Moreno's ending of fuel subsidies, in line with his embrace of more liberal market-oriented policies, has sparked widespread social unrest. Initial demonstrations came in the form of strikes by transport unions. However, subsequent protests have increasingly been supported by the poor indigenous communities least able to absorb disruptive economic change. Per the graph below, GeoQuant did not anticipate these protests: while Social Polarization Risk has been both elevated and volatile of late, we projected a decrease through Q4/2019 before the fuel subsidies were lifted (see the dotted line). Now Social Polarization Risk is rising into early November, suggesting that protests will persist and that Moreno's attempt to sidestep confrontation by moving his government from Quito to the small port city of Guayaquil will not be sufficient to calm the storm, but will give it time to fade. That said, the Moreno government is not at risk of government or regime change given support of the army and business community, and concessions to indigenous communities should eventually defuse the conflict.

Market Movements | Spotlight on UK/USDGBP

Goldman Sachs has come around to the GeoQuant view that Brexit risks are actually skewed to the upside, supporting GBP appreciation. UK Sovereign Risk has been a valuable leading indicator of the GBP since the Brexit referendum in June 2016, correlating positively with r = +0.61. The correlation reverses in late 2018 when foreign exchange markets, incorrectly expecting Brexit to finally get sorted out, strengthen the pound. By March 2019 it becomes clear PM May's proposal won't succeed and the pound resumes weakening. By contrast, our Sovereign Risk indicator, which had been noisy but steady from late 2018, begins to decline gradually after Johnson becomes prime minister in late July. Our model forecasts that Sovereign Risk will decline until December, indicating, in line with GeoQuant's call that a no-deal Brexit will not get through the House of Commons, that Brexit politics should prove pound positive in the near-term. Either Johnson will strike a deal with the EU or parliament will dismiss Johnson, delay Brexit, and force a public vote -- either on a second referendum or a snap election.

The figure below provides our 50-country forecast of top-line Political Risk for the month ahead (today through 11 November). Red (green) bubbles indicate increasing (decreasing risk). Full trend lines available on the app. Custom insights available for clients.