Author: Han Tan, Market Analyst at FXTM
The Turkish Lira soared on Monday to briefly become the best-performing currency in the world, following the stunning results from the Istanbul mayoral elections over the weekend. TRY jumped by as much as 1.8 percent against the US Dollar at the start of the week, to register its biggest gain in two years, before moderating.
However, to put the recent rally into its proper context, Monday’s climb for the Lira was a relief rally of sorts, as the currency unwound some of its losses in the second quarter. Since the initial Turkish national polls were held on March 31, with the Istanbul results then later contested, the Lira had declined by more than four percent leading up to the mayoral election redo this past weekend, as the uncertainties surrounding the polls weighed on investors’ minds.
To be clear, the election risks were not the only factor affecting the Turkish Lira in recent months. Heightened US-China trade tensions, as well as the expected slowdown in global economic growth have severely curtailed global risk appetite, as evidenced by the surge in safe haven assets such as Gold, the Japanese Yen, and US Treasuries. As a result, several currencies in the EM universe, including the Chinese Yuan, South Korean Won, and the Turkish Lira, sustained losses against the Dollar in the current quarter.
Looking ahead, recent gains in the Lira could be standing on shaky ground, as markets now try to ascertain what Istanbul’s elections results will ultimately mean for the broader Turkish political landscape, and how that could affect the thinking behind its future economic policies. Perhaps more importantly, investors will be contemplating whether such domestic uncertainties could compound Turkey’s long-term economic outlook, even as it contends with external headwinds.
For the optimists among us however, the Turkish Lira could see some near-term catalysts for further gains.
Should the high-stakes meeting between US President Donald Trump and Chinese President Xi Jinping at the G20 summit later this week produce a market-friendly result, an outcome that dilutes tensions between the world’s two largest economies, emerging-market currencies would certainly welcome such a scenario and may seize the opportunity to push higher going into July. Risk assets have also been supported by the easing bias out of the US Federal Reserve. Should the Federal Reserve cut US interest rates over the coming months, as expected, this would be seen as a trigger to weaken the Dollar further and encourage more gains for EM currencies, including potential for the Turkish Lira to reach greater heights.