Photo by Omid Armin on Unsplash

The Turkish Lira briefly tumbled as much as 4.1% to breach past the 20 per US dollar mark for the first time ever amid thin liquidity early Monday. At that point the central bank intervened, and the currency quickly pared losses and was last trading at 19.8339 per dollar, which excluding the brief flash crash, is the lowest level on record for the distressed currency.

The ongoing plunge in the Lira comes days ahead of the presidential runoff round on Sunday, after President Recep Tayyip Erdogan failed to secure more than 50% of the ballots in the first round of voting on May 14, although the final outcome appears to be assured after earlier today Turkey's Sinan Ogan endorsed Erodgan in the runoff round, effectively guaranteeing him a victory. That said, one-week implied volatility on USD/TRY pair jumps to 30% versus 17.2% on Friday.

And if it's not the election outcome, what caused the sudden collapse in the lira? The reason, as we pointed out on Friday, was a dire note by Goldman FX strategist, Clemens Grafe, in which among other things, he found that the central bank's "net foreign assets fell by US$3.2bn to negative US$14.8bn", warned that "given the slowdown in the rise of TRY deposits and this week's decline, we think TRY liquidity in the system is becoming more limited" and, most ominously, predicted that "pressure on the reserves has shifted from the current to the capital account despite the measures in place to limit capital outflows. "

Below we excerpt from the Goldman note which, if accurate, could lead to a rapid and dramatic reprising of the lira far lower from its current, manipulated, and artificially-lofty level:

Goldman's report effectively recaps what happened last week, when Turkey’s gross foreign exchange reserves posted a record fall in the week before Sunday’s inconclusive elections, as the central bank expanded efforts to support the lira.

The reserves dropped by $7.6 billion in the week to May 12 to $60.8 billion, central bank data showed — the biggest weekly fall in the figures going back to 2000. Net reserves as defined by the IMF, including swaps, also fell to $2.3 billion, the lowest in over two decades.

The data mark an acceleration in attempts to defend the currency (which in turn is driven by an accelerating rush by the population to converted increasingly worthless lira into hard currency), seen by citizens as a key barometer of the economy’s health and a major point of contention in the election.

It's not just FX: Turkey's five-year credit default swaps climbed 16bps on Thursday, extending this week’s advance to 185bps, climbing to the highest level since Oct. 28, and following last week's biggest 3-day jump in 2 years. The move in CDS suggests a “challenging picture” for the lira, Istanbul-based Unlu&Co. wrote in its daily report. The rising trend in USD-TRY is “likely to continue in the short-term,” it said.

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