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United States threatens more sanctions on Turkey — JAILED PASTOR

18 August 2018

The currency has lost almost 40 percent against the dollar this year, driven by Erdogan's increasing influence on the economy and his call for lower interest rates despite the high inflation.

Emerging market borrowing costs also continued to climb, with the JPMorgan EMBI hard currency sovereign debt index at 365 basis points, its highest in a week.

The U.S. Department of the Treasury slapped sanctions on Turkey's justice and interior ministers on August 1, citing their roles in the detention of the United States pastor.

"Any conversations we have with China to come up with a deal and any conversations we have with Mexico would be seen as a win for the U.S." said Jeffrey Frankel, president at Stuart Frankel & Co in NY. "We are not going to take this sitting down". He demanded Brunson's release, saying "they can't take our people".

US Treasury Secretary Steven Mnuchin announced that Washington is "prepared" to impose further sanctions against Turkey if Ankara refuses to release the American pastor detained in 2016. Brunson has denied those charges. Trump, who counts evangelical Christians among his core supporters, has increasingly championed the pastor's case.

Turkey's lira fell once again after the trade minister, Ruhsar Pekcan, said on Friday that her government would respond to any new trade duties, which Mr Trump threatened in his overnight tweet. Both countries aim to resolve an escalating tariff war.

The Turkish lira rose half a percent to 5.7933 per dollar as sentiment improved.

Tit-for-tat tariffs by the U.S. and China on another $16 billion of each other's goods are due to kick in next week, and President Donald Trump has threatened to go after even more Chinese imports in the future.

"They made up this phoney charge that he's a spy", Trump said. "We remain hopeful there will be a prompt resolution".

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"Tail risks have increased. and we are cautious in the short term given the escalation of risks in key EM economies", said Ewout van Schaick, head of multi-asset at NN Investment Partners.

"Turkey's external financing requirements are large", Jason Daw at Societe General wrote in a note to clients.

ENERGY, BANKS The Turkish banking watchdog has taken steps to stabilise the currency, limiting futures transactions for offshore investors and lowering limits on swap transactions. On Friday, it further broadened those caps.

Alvin Tan, FX strategist at Societe Generale, said Friday's moves were more to do with dollar weakness as investors show greater appetite for taking on risk than euro strength. It estimates Turkey's short-term external debt at $180 billion and total external debt at $460 billion - the highest in emerging markets. But the sell-off has increased the cost of servicing that debt, particularly for companies whose revenues are exclusively in lira.

On Thursday, Finance Minister Berat Albayrak addressed hundreds of foreign investors from the US, Europe and Asia via a conference call in a bid to soothe the markets.

Its proximity to conflict-ridden states and involvement in North Atlantic Treaty Organisation poses a serious concern of possible worldwide effects of a potential economic collapse. Turkey is dependent on imports, priced in hard currency, for nearly all of its energy needs.

Specialist trader Meric Greenbaum works at his post on the floor of the New York Stock Exchange (NYSE) in New York, U.S., August 17, 2018.

Turkish markets will be closed from midday on Monday for the rest of the week for the Muslim Eid al-Adha festival.

United States threatens more sanctions on Turkey — JAILED PASTOR