The biggest forex news in the coming days will be the Turkish election, which will happen on Sunday. This will be an important election that will determine the future of the Turkish lira, which has plunged by more than 350% in the past five years.
Overview. The Turkish lira is the official currency of Turkey. In recent years, the lira has experienced significant volatility, losing value against major international currencies such as the US dollar and the euro.
One of the main factors contributing to the lira's instability is the political situation in Turkey. The country has undergone a series of political upheavals in recent years, including a failed military coup in 2016 and a constitutional referendum in 2017 that expanded the powers of President Recep Tayyip Erdogan.
Erdogan and his ruling party, the AKP, have been accused of eroding democratic institutions and suppressing opposition voices, which has led to concerns about the country's political stability and economic future. In addition, Erdogan's unorthodox approach to economic policy, including his resistance to raising interest rates, has also contributed to the lira's decline.
The upcoming Turkish elections are also a factor that could impact the lira's value. As Turkey is prepared to hold presidential and parliamentary elections there are concerns that the election process could be marred by political unrest and uncertainty.
Overall, the combination of political instability and economic challenges has created a challenging environment for Turkey and its currency.
The Turkish lira is already facing some of the most volatile conditions across global currency markets in the run-up to the country’s landmark elections this weekend, with traders predicting a likely collapse if incumbent Recep Tayyip Erdogan retains his presidency.
The lira is currently trading at record lows of 19.56 against the U.S dollar and market watchers forecast that it still has further room to plunge.
Turkey is holding both its presidential and parliamentary elections on Sunday. In the event of a victory by Erdogan, it’s “highly likely the Turkish lira collapses within months,” the founder of advisory firm Cribstone Strategic Macro Mike Harris told CNBC.
“Ultimately the lack of confidence in investment will mean that the Turkish Lira will probably be among the worst performing currencies in the world for some time,” he said.
This is largely owed to the current president’s unorthodox economic policies.
“For a number of years under the guiding hand of Erdogan’s nutty monetary ideas, the Turkish lira has been wildly volatile and in a state of crisis,” said Steve H. Hanke, who is a professor of applied economics at The Johns Hopkins University.
A ‘very sharp rally’ if the opposition wins?
Erdogan’s biggest contender lies in joint opposition candidate Kemal Kilicdaroglu, who pledged to reinstate orthodox economic policies and cool Turkey’s sky-high inflation rate.
And if the opposition emerges victorious, the lira will begin to see some strengthening, at least initially, said Upadhyaya.
“It will mean that the central bank of Turkey regains its independence, that they will be allowed full mandate to pursue traditional economic policies,” he said.
Higher interest rates would help lower the country’s inflation rate, lead to a “pretty serious recession” and help firm up the foreign currency reserves that have been depleted trying to defend the lira, he continued.
The President's decision not to increase interest rates was a key factor in the historic drop of the Turkish lira, which plummeted from less than 4 to the dollar in 2018 to 18 against the dollar in 2021. According to Pioneer Investments portfolio manager Paresh Upadhyaya, concerns over election uncertainty and potential government changes regarding foreign exchange management are behind the lira's high volatility rate. Wells Fargo Emerging Markets Economist and FX Strategist Brendan McKenna predicts that if Erdogan wins, USD/TRY could rise to 23.00. McKenna believes that the lira is overvalued and that its value could fluctuate sharply depending on the election's outcome. If the opposition wins, the lira could initially strengthen, and the central bank would regain independence to pursue traditional economic policies. In the long run, a regime change could result in a sharp rally in the lira, according to McKenna.
However, a report by Commerzbank suggests that the market's enthusiasm may fade if the coalition government runs into policy implementation or cooperation challenges. Turkey's inflation rate is close to 50%, but the impact of the lira's performance is likely to remain domestic, and there are no expected contagion effects on other emerging or G-10 currencies, according to Upadhyaya.
Seems very simple for short term trading.
If Erdogan wins ,expect economic uncertainty and a further run on stocks and depreciation of the lira.
Alternatively, if the opposition win, expect a strong short term jump in favour of the Turkish lira.