What next after Erdogan's win?

USD/TRY

Prime Minister Recep Tayyip Erdogan won Turkey's presidency Sunday, avoiding a second round of voting. Erdogan's critics fear the outcome of Sunday's vote will leave him too powerful, and erode the presidency's traditional role as a check on the powers of the executive.

Economy minister Nihat Zeybekci said that the central bank's core mandate for price stability should be expanded to include employment and growth, although such a move would not be a top priority for the government in the coming period.

Turkey's current account balanced improved almost 40% over the first five months of the year but this is set to slow from here. While the gold balance should remain supportive, events in Iraq are a concern for Turkish exports, as is the weakness in the Eurozone. A turn in credit growth also points to improving domestic demand. Though inflation should decline, the pace of improvement in recent months has been disappointing.

Looking ahead, the most obvious risk is that the central bank of Turkey continues to cut rates, in part due to political pressure to do so. The central bank has already cut its main one-week repo rate by 175 points since May. Turkey is highly susceptible to changes in global liquidity conditions because of its large current account deficit. We do not expect the same sort of foreign capital outflows that materialised over the course of the second half of last year, we also do not see a rapid return to hefty inflows. Recent weakness in global risk appetite combined has translated into a correction in Turkish assets, most visibly in domestic fixed income but much less so in the foreign exchange rate.

Ratings agency Fitch said political risk would weigh on its credit ratings through its potential to discourage capital inflows and reduce policy predictability. Fitch said that political tension was likely to remain high as Erdogan seeks to extend the powers of the presidency and his pressure for rate cuts could undermine the central bank's "tenuous credibility".

With the market focus on a lack of clarity regarding Turkey's future monetary policy and the make-up of its economic management team, Istanbul shares lagged the emerging benchmark and the lira shed initial gains on Monday.

Significant technical levels:

Resistance: 2.1580 (session high Aug 11), 2.1873 (high Aug 8), 2.1970 (Mar 28)

Support: 2.1320 (session low Aug 11), 2.1200 (low Aug 5), 2.1078 (low Jul 30)

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