Markets price in the best scenario in Turkey-US relations

By looking at developments last week, the markets have priced in the “best scenario” in Turkey-U.S relations. They will continue to price in those positive expectations unless there are reports suggesting a different course.

It looks like the statements made following the visit by U.S. Secretary of State Rex Tillerson to Turkey last week satisfied the markets. Following those statements, all markets priced in positive expectations.

The talks between Turkish and U.S. officials had a particularly favorable impact on the forex market, with the Turkish Lira gaining 0.6 percent against the dollar. On the same day, other currencies lost value against the dollar, so we can say the appreciation of the lira was largely attributed to the positive response to Tillerson’s visit.

In the coming weeks, moves in global financial markets will set the trend for all currencies. Given that fact that the dollar is fluctuating in global markets, the lira will inevitably follow a similar course. However, if the current positive mood in relations with the U.S. remains in place then the lira may outperform other currencies.

Despite all the tensions between Ankara and Washington, markets seem to have ruled out the possibility of a military confrontation between Turkey and the U.S., following rising tension over the situation in Manbij.

Because of heightened geopolitical risks the lira has depreciated against the dollar more than most other currencies over the past two years. We therefore hear some analysts arguing that there will be a correction in favor of the lira in the period ahead. According to those analysts, the lira may continue to gain value in the coming period.

In other words, the markets appear to believe that there will be no problems between Turkey and the U.S. anymore. We will see if the markets continue to price in the best possible scenario in the coming weeks.

Many question marks

Pricing in the best scenario effectively means that Turkey and the U.S. are expected to overcome all their differences over Syria and the risks of potential U.S. fines and sanctions will be eliminated.

However, speaking with diplomatic circles and some U.S.-watchers it seems that not everything is so rosy. Media reports suggested that during talks between Turkish and U.S. officials possible fines on Halkbank and sanctions that could be triggered by Turkey’s decision to buy S-400 missile systems were also discussed. There were reportedly some encouraging developments on those fronts but the three commissions planned to be set up between Turkey and the U.S. will focus on other issues: The Syrian town of Manbij, the Syrian Kurdish People’s Protection Units (YPG), and the Fethullahist Terrorist Organization (FETÖ).

U.S.-watchers say Tillerson could not give any guarantees regarding the outcome of cases currently pending at the U.S. Treasury and the Congress, and could not provide any details of those dossiers. The decision to set up joint commissions does not necessarily mean that the U.S has moved closer to accepting Turkey’s arguments, simply that the two sides only tried the reduce tensions.

In short, many observers say it will be difficult for Turkey to see any concrete measures from the U.S on these thorny issues. They also say they would not be surprised if in a few weeks Turkish leaders may once again start to harshly criticize the U.S.

I hope that the markets are not taking too much heed of statements from presidential aides claiming that “all troubles are now over.” If optimistic expectations regarding Turkey-U.S. relations fail to materialize, the markets’ reaction may be very strong next time around.