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Lira volatility picks up once more as geopolitical risks heat up again

Geopolitical risks have once again returned to haunt Lira sentiment

The Lira managed to strengthen and rebound late November to 5.70 but is entering Christmas week at its weakest level at 5.95 USDTRY is at risk to advancing above 6 and might even target 2019 highs above 6.25 not seen since May This Central Bank of Turkey (CBRT) is dramatically reducing the benchmark lending rate to as low as 12%, half what it was in July at 24%

By: Jameel Ahmad, Global Head of Currency Strategy and Market Research at FXTM

The Turkish Lira is unable to catch a break. Just as the currency of Turkey (USDTRY) managed to strengthen and rebound late November to 5.70 it is one month later entering Christmas week at its weakest level in over two months (5.95). 

Geopolitical risks have once again returned to haunt Lira sentiment, with the U.S Senate passing legislation to potentially punish as policy differences between the US and Turkey over Syria remain as well of the purchase by Turkey of a missile defence system from Russia. These are seen as the factors that have encouraged the Senate to pass legislation, which has added a sting into the Lira’s tail and will now be provided to President Trump for approval. 

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As of Thursday December 19 the Lira had lost a further 2% for the week and close to 12% for 2019. Taking into account that the currency lost close to 30% of its value during the 2018 currency crisis, the USDTRY remains nearer to record highs above 7 than where it commenced 2018 at 3.80.

Should President Trump decide to approve the legislation, USDTRY is at risk to advancing above 6 and might even target 2019 highs above 6.25 not seen since May. Authorities have already adopted measures to prevent Lira weakness, and this has perhaps put a limit on USDTRY peaking its head above 6 for now.

Another issue that international spectators are aware regarding includes escalating tensions between Turkey and Cyprus over the latter’s natural gas resources, something that has encouraged Turkey to deploy a drone to Turkish-occupied Northern Cyprus this week. It has been reported that if President Trump does approve the legislation, Turkish President Tayyip Erdogan has been quoted as expressing that his administration would consider threatening to cut off U.S access to a strategic airbase in the south of Turkey. The increase in tensions has alarmed investors but both United States President Donald Trump and Turkish counterpart Erdogan are considered as close, which will hopefully limit the ceiling for an escalation in weakening bilateral relations between the two countries. 

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Before a fresh round of political risks alerting investors, the currency had been showing a path of gradual strength as the macro-economic conditions in Turkey gradually improve. This Central Bank of the Republic of Turkey (CBRT) is dramatically reducing the benchmark lending rate to as low as 12%, half what it was in July at 24% to help economic growth. The inflation rate in Turkey has also improved as dramatically to 9.26% in recent months, a far cry away from 25% in October 2018 following the currency crisis of that summer and the continuation of an improved inflation outlook should help economic conditions. The less Turkish citizens are feeling pressured by increased costs of living associated with inflation, the more likelihood of disposable income being spent on its economy. 

Though in order to encourage the Turkish economy to be able to manage the ambitious 5% GDP target that has been set for 2020, inflation needs to remain on a trend lower and an ongoing spell of weakness in the Lira threatens this objective.  For more information, please visit: FXTM