Turkish Lira: The Game Of The Games?


  • The Turkish Lira is a very volatile, complicated and risky asset. Political turmoil weight heavily on it like this week.
  • President Erdoğan is pushing interest rates lower. That can weaken the currency further.
  • The Lira short is promising but very dangerous.

Lira one of the most volatile currencies

Foreign Exchange (FX) or currency prices are very dangerous, often totally unpredictable. Many times the opposite happens of what should become logically as a consequence of the processes or events. There is not necessarily a long-term trend, such as in the stock market. (Where the majority of the companies are profitable and therefore increasing shareholder’s value in the long term.)

But even among currencies, some are calmer, less moving, and others, more dangerous and volatile. Many emerging market currencies are among the more risky ones, but Turkish lira is on top of it all.

Turkey at war

At the beginning of this week, US President Donald Trump announced the retirement of his troops from the Kurdish region in Northern Syria. Turkey began to move troops to the territory and bomb some targets almost immediately. Turkey is in fact in war with the Kurdish forces in Syria.

Allegedly, with the retirement of the US, Saudi Arabia and Israel can also increase their activity in the region. The “proxy war” may intensify. The area resembles a barrel of gunpowder.

USA-Turkey secret agreement?

How reacted the Turkish Lira? I wondered how much it would weaken, as in the past this was usually the response to the escalation of political tensions. But the Lira made – almost nothing, at least in the first 1-2 days. Why? I understood it later based on the article of Bloomberg that the markets took the move of Trump as a positive event for Turkey:

suggesting a rapprochement of sorts between Turkey and the U.S. But after Trump started taking flak at home, including from congressional allies, he tweeted that he’d “totally destroy and obliterate” Turkey’s economy if it did anything he considers “off-limits.”

The state maintaining the Lira

There was also another factor that explained the restrained price movement: (Bloomberg)

Turkey State Banks Prop Up Lira Ahead of Syria Incursion (…) the state banks sold U.S. currency around the 5.84 per-dollar mark (…) bought the equivalent of about $1 billion of lira on Monday and Tuesday () The dollar sales may revive a debate about the strength of the central bank’s foreign-currency buffers (…) in March state banks were said to have sold between $10 billion and $15 billion to stem the lira’s depreciation.

The Turkish Lira, Chart
The Turkish Lira (Chart: Tradingview.com)

So, just one or two days after the original news, as Donald Trump warned Turkey and threatened it, the Lira began to weaken. Now it is four percent lower than one week before. But there is another factor in interest rates and the economy.

Rate cuts promised

The Turkish president Recep Tayyip Erdoğan “Praises Central Bank’s Rate Cuts, Promises More to Come” – wrote Bloomberg on October 6, 2019. The president has long been known to be in favor of interest rate cuts. Politically, he is interested in strong economic growth. While the weakening of the Lira is usually attributed to the vicious sabotage of ugly external enemies.

The last interest rate cuts were a success for him, also because the lira didn’t weaken any further. It was supported also by the interest rate cut expectations and rate cuts in Europe and the US this year. He may have been encouraged by this and will take the central bank for further cuts. But it is no longer certain that the Turkish lira will get away without weakening. (Lower interest rates mean mostly lower currency prices.)

Governor fired

Erdoğan fired the governor of the Central Bank in July for not cutting rates fast enough. Lower inflation rates are explaining the rate cuts, but growth is moderate and debt is high in the country. The economy still seems to be vulnerable.

The USD/Turkish Lira price
The USD/Turkish Lira price in long term (Tradingview.com)

The fights in Syria can end fast but can be also a long-term disaster for Erdoğan and his country. Kurdish Warriors have often proven themselves, tough opponents. A prolonged war, a new terrorist attack wave or unrest of Kurdish people inside Turkey can weaken the Lira further.

Conclusion: The Lira short is promising but very dangerous

Political turmoil and uncertainties in Syria, near the Turkish border. A weakening president Erdoğan after the spring municipal elections. He is particularly committed to interest rate cuts. Traditionally increased volatility in Autumn months. Turkish state banks are intervening to hold the Lira artificially with their buying.

All these factors say to me that the relatively high Lira price could be much lower in the next couple of months. I’m thinking about shorting the Lira (but can’t decide yet). If Lira doesn’t weaken quickly, it is advisable to liquidate the position. Because the relatively high interest rates are jeopardizing your capital. The positions of short-sellers are getting worse every day automatically.

Disclaimer 1

I have no positions in Turkish assets today or had in last months. But I’m thinking about opening new trades shortly.

Disclaimer 2

I’m not a certified financial advisor nor a certified financial analyst, accountant nor lawyer. The contents on my site and in my posts are for informational and entertainment purposes and reflecting my collection of data, ideas, opinions. Please, make your proper research, or consult your advisors before making any investment or financial or legal decisions.

(Cover photo: Pixabay.com, with improvements.)

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