Currency traders prepare for complete chaos as Turkey heads towards elections


Turkish flag on Denizbank building. Türkiye is expected to vote on Sunday.

Ismail Firdaus | Bloomberg | Getty Images

turkish lira Global currency markets are already experiencing some of the most volatile conditions in the run-up to the country’s historic elections later this week, with traders predicting a possible collapse if Recep Tayyip Erdogan remains in his presidency.

The lira is currently trading at a record low of 19.56 U.S. Dollar And market watchers expect it to go further down.

Both presidential and parliamentary elections are being held in Turkey on Sunday. In the event of a victory by Erdogan, “the Turkish lira is highly likely to collapse within months,” Mike Harris, founder of advisory firm Cribstone Strategic Macro, told CNBC.

“Ultimately this lack of confidence in investment will mean that the Turkish lira will probably be one of the worst performing currencies in the world for some time.”

This is largely due to the unorthodox economic policies of the current president.

“Under the guidance of Erdogan’s nutty monetary ideas for several years, the Turkish lira has been wildly volatile and in a state of crisis,” said Steve H. Hanke, Professor of Applied Economics at The Johns Hopkins University.

The Central Bank of the Republic of Turkey did not immediately respond to a CNBC request for comment.

Turkey’s monetary policy prioritizes growth and export competitiveness rather than reducing inflation. Erdogan supports the unorthodox view that raising interest rates increases inflation, rather than controlling it.

The president’s refusal to raise rates played a role. Key role in historic decline of lira It saw it fall from less than 4 to the dollar in 2018 to 18 to the dollar in 2021.

“Worry about the actual election uncertainty, and then uncertainty over a possible change in government and how they might manage FX, is what’s behind this rapid increase in FX volatility to this 42.7% level,” Paresh Upadhyay, Fixed Income And said director Amundi currency strategy in the US, who said that the volatility rate of the lira was around 10-12% in December.

“Should Erdogan win, which is our base case assumption, USD/TRY could move to 23.00,” Brendan McKenna, emerging markets economist and FX strategist at Wells Fargo, wrote in an e-mail.

“The lira has been overvalued as a result of the intervention efforts, and depending on which way the election ends, the currency could move sharply in either direction,” McKenna said.

‘Very fast rally’ if the opposition wins?

Erdogan’s biggest contender is Kemal Kilikdaroglu, the candidate of the United Opposition, who pledged to restore conservative economic policies and calm Turkey’s sky-high inflation rate.

And if the opposition is victorious, the lira will see some strength, at least initially, Upadhyay said.

“This would mean that Turkey’s central bank would regain its independence, giving them a full mandate to pursue conservative economic policies,” he added.

Higher interest rates will help reduce the country’s inflation rate, leading to a “pretty severe recession” and help shore up foreign exchange reserves, which have been depleted in an attempt to protect the lira, he continued. kept.

In a regime change scenario, the lira could still experience a very near-term decline as FX intervention efforts pay off, but could see a much sharper rally in the longer term.

Brendan McKenna

Emerging Markets Economist at Wells Fargo

However, any swift positive response would be short-lived, according to a Commerzbank’s May 9 Report,

“The coalition is made up of smaller parties that came together only to oust Erdogan,” wrote Ghosh, the bank’s senior emerging markets economist.

“Market enthusiasm could fade if the coalition faces cooperation or policy implementation challenges, which will remind markets that Erdogan could return to power,” the report elaborated.

Despite this, Wells Fargo’s McKenna anticipates a more optimistic long-term outlook for the currency.

“In a regime change scenario, the lira could still experience a very near-term decline as FX intervention efforts stall, but could see a much sharper rally in the longer term.”

D-Linked Market

Turkey is currently battling an inflation rate of 50% after hitting a 24-year high of 85.51% last October.

Whether the lira freefalls or gains some ground, the impact is likely to still be contained domestically.

“Turkey is now a predominantly de-linked market with very little flow and no real international participation,” Ghosh told CNBC in an e-mail. Similarly, Upadhyay does not expect any spillover effect.

“I do not expect any contagion effect affecting other emerging market currencies or even G-10 currencies,” he added.

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