Here’s Why I’m Bullish on the Turkish Lira
The Turkish lira could see one of the strongest rallies of any currency compared to the U.S. dollar in the next few days. The USD-TRY exchange rate is now is now about 2.9, up from 2.15 one year earlier. However, my exchange rate forecast shows the Turkish lira offers investors one of the most bullish currency trading opportunities anywhere.
Indeed, the U.S.-dollar-to-lira relationship could drop to below the 2.00 mark–levels not seen since the start of the Syrian Civil War in 2011. This would be the case should Turkish voters elect a strong government on Sunday. Turkey is still in the middle of a political and economic storm and many scenarios are likely, but a period of transition is about to end, pushing Turkey to the next phase of development.
USD-TRY Exchange Rate Forecast for 2016
Turkey has struggled to regain political stability, to consolidate democracyand, where investors are concerned, to improve market confidence. In fact, last June’s elections at best produced a stalemate, since no party has managed to secure a majority. Attempts to create a coalition have failed. Although he has won 41% of the votes, the majority party AKP lost considerable consensus compared to the previous election in 2011, when it got almost 50% of the votes.
Meanwhile, the escalation of terrorist attacks, tensions with Syria (and now also with Russia), and the massive inflow of refugees have increased political and economic uncertainty. This is reflected as much on the street as in the financial markets. Nevertheless, there is reason to be optimistic in the medium- and long-term for a combination that could offer some short-term benefits for currency investors.
Democracy is still seen as the only alternative for the majority of Turks. The election of a government based on a strong coalition would be the best result for the country. Foreign and Turkish investors alike would see this as paving the way to ease social tension while accelerating consumer confidence in the shorter term.
The spillover effects for the markets would be a rally, especially after a long period when the Istanbul Stock Exchange has lost more than 30% since the Turkish lira reached historical lows.
Signs of a Rebound in Turkish Lira Already Visible
The Turkish lira seems to have stopped collapsing, even as the social and political difficulties have intensified in the past month, marked by a major bombing that killed over 140 civilians. In fact, the exchange rate between the Turkish lira and the dollar stood at around 2.90, showing a strengthening of the Anatolian currency 3% since early October and on a monthly basis.
Since the start of 2015, the Turkish currency has lost over 20%. But the currency has picked up in October, going well above the lows reached in September. What’s more, the recovery started in coincidence with the worst period of recent Turkish history, as Turkey deals with a political crisis, terrorist attacks from ISIS, and intensifying pressure from Kurdish separatists all under the umbrella of high inflation, now heading above eight percent (it was 9.5% in April). (Source: “Turkish inflation floats up beyond expectations,” The Financial Times, Oct. 28, 2015.)
The smart money in the wake of the terrorist attacks in Ankara last October 10 would have been in a fire sale of the lira, accelerating the bearish trend of the summer. However, the opposite happened; the stock market has held and so was the currency because most emerging markets have rallied over the last few weeks due to continued inaction by the U.S. Federal Reserve on raising interest rates. The October 29th announcement–or lack thereof–on interest rates has postponed any possibility of a hike to next December at the earliest.
In such a context then, the mini-recovery of the lira seems to be revving for a much more significant rally, whereas the dollar weakened on average by 1.5% against major global currencies last month (except for the euro).
Markets Have Already Priced in Worst Case Scenario
Investors have already assumed a worst-case scenario for Turkey while the European Union has committed to disburse as soon as possible some $3.3 billion to assist the country in managing the inflow of Syrian refugees. The confirmed funds will give the Turkish government a strong hand in boosting Turkey’s current account, which shows a deficit of around five percent of GDP, more than any other emerging market.
Turkey will now be going back to the polls for the second time since June 6th. On that occasion, the AK Party, headed by President Erdogan and Prime Minister Ahmet Davutoglu, failed to get an absolute majority in parliament. According to opinion polls, this scenario is unlikely to materialize now. The market, however, expects the inevitable formation of an executive of the coalition between the AKP and the CHP, the latter a leftist but market-friendly party.
A weaker president Erdogan is seen as essential in loosening the pressure on the central bank governor, Erdem Basci. (Source: “Turkey Central Bank raises inflation forecasts,” Hurriyet, Oct. 28, 2015.) He has tried to correct strong inflation trend by raising interest rates for months, only to face the AKP-dominated government and President, asking him to cut rates, regardless of the consequences.
A majority formed between AKP and CHP would not last long, possibly a year or 18 months. Erdogan may try to return Turkey to the polls as soon as reasonably certain to obtain an absolute majority of seats. Then again, the favorable emerging market climate thanks to the likelihood that interest rates in the U.S. will be raised minimally (if at all) will sustain the Turkish lira even in the face of possible instability.
Still, Erdogan has lost considerable support and the CHP could be heading to a majority government now, which would see the lira shoot upwards.
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