As the Turks head towards a contentious election this summer on June 7th, the country’s currency is being taken for a ride against the bullish trending dollar. To that end, the greenback seems keen to continue charging ahead against emerging market currencies into this year with no signs of letup on the horizon. We have seen the ruble nosedive along with other emerging currencies which has allowed the dollar to strengthen against EM’s to a level not seen since 2002, see the chart below:
It is being reported that pressure on the lira has been a consequence of President Recep Tayyip Erdogan’s public conflict with the central bank over interest rates. The President of Turkey has been calling to slash rates to boost growth amid lacking economic indicators (growth was 2.9% in 2014, well behind the government’s official target of 3.3%) and there have been worries about a shake-up in the economic team after the June 7th parliamentary election.
Tuesday’s low even prompted the Turkish central bank to issue an official statement to support the currency as reported by the AFP, saying it would consider measures to support the embattled lira. The lira rallied somewhat following the statement from the central bank.
“Turkey’s risk premium is on the rise,” said Isik Okte, investment strategist at TEB Invest.
Turkey is no stranger to tough inflationary economic times, although today’s atmosphere is a long way away from those days. As you can see in the chart below the country for a wide 20+ year stretch was coping with stepping high double-digit inflation. The hyper-inflation in the 80s led to banknotes in ever larger denominations and were put into circulation nearly every 2 years since 1981. The highest-denominated banknote had even reached a level of (20,000,000). To reset the economy, New Turkish Lira was put into circulation on January 1st, 2005 in a re-denomination of the currency and inflation since that time has been under control within the single digits. Today is nowhere near this kind of atmosphere, but it serves as a healthy reminder of what can happen.
Inflation rate since 1975. Source: tradingeconomics.com
This year we have seen the Moscow Exchange begin trading in FX futures for Turkish Lira along with ICE FUTURES, and also retail broker FXPRIMUS started offering lira pairs to it’s traders.
So what could the near term picture hold for the lira? Scotiabank in their recently released April 2015 Turkey report issued the following diagnosis:
Despite firming slightly (lira) mid-March after the Central Bank of the Republic of Turkey (CBRT) kept interest rates unchanged and the US Federal Reserve indicated a less hawkish tone, the Turkish lira (TRY) continued to extend losses against the US dollar (USD) over the past month. At 2.61 at the time of writing, USD/TRY remains near a record low, due to Turkey’s challenging economic backdrop, dovish CBRT and inflationary pressures. The TRY is forecast to end 2015 at 2.60 against the USD. Improving fundamentals could lead to a modest appreciation in TRY through the end of 2016 to 2.55.
The lira touched a low of 2.6803 against the dollar Tuesday. Courtesy: BarChat
To view a report on Turkey’s prior inflation troubles, click here (PDF).