Coup Attempt Could Hammer Turkish Lira
The Turkish Lira has fallen sharply against the dollar as the coup attempt unfolded in Turkey. Not minutes after the Prime Minister of Turkey, Binali Yildirim, reported that there was a coup in progress, led by a group of military soldiers who were acting outside the chain of command. The Turkish lira has reacted such that the USD to TRY exchange rate has already fallen more than 4.5% against the greenback.
The Turkish Lira could see even more substantial drops as the markets re-open around the world after what is shaping up to be a highly charged weekend. There is no doubt the USD to TRY exchange rate will endure a wave of bearish pressure. Nevertheless, given the likelihood of a military uprising. The local media have reported that military aircraft and helicopters have flown over Ankara and Istanbul, the two most important cities.
Where Is the Turkish Lira Going Next?
Evidently, investors are fearing a period of instability in Turkey, forcing a massive selloff of the Turkish currency. The Turkish Prime Minister has said that the group of military rebels will pay a different kind of ‘currency’. The result of the legislative elections last June 8, in which the government’s Justice and Development Party (AKP) lost its absolute majority, had already caused sharp drops in the Istanbul Stock Exchange. The Turkish Lira, meanwhile, fell against all major currencies, forcing the intervention of the Central Bank of Turkey.
In the absence of more information, it is normal that such events cause such movements. So the question is how long and how low will the Turkish Lira go – and how long will it stay in that unenviable position. As of July 15 at close of market in New York one U.S. Dollar was trading at 3.02 TRY. Last fall, it was about 2.9 Turkish Lira. A year ago it was 2.15!
Here’s how to play the coup and the Turkish Lira. It all depends on how the world reacts and what kind of coup it will be. If Turkey’s NATO partners do not react unfavorably – and so far, given that Germany has rejected President Erdogan’s request for asylum, as he has already fled the Turkish capital Ankara – the Turkish lira could experience a rebound in reasonable time. Turkey will likely remain strong, the military will oversee a transition as they have done before in such situations – the last one being in 1993.
Turkey will need to demonstrate stability and reestablish market confidence. The Turkish people have become ever more accustomed to democracy. This is not like the Arab Spring, where the concept of democratic government was alien to most of the countries that have been dragged down a path of instability. After the inevitable collapse of the Turkish market, the country’s economy is strong enough to recover. Moreover, as with other emerging market currencies, the Turkish Lira benefits from lower U.S. interest rates.
The Brexit has made sure that the Federal Reserve will not be raising those rates any time soon. In such a scenario, the USD to TRY exchange remains an interesting speculative position. The Turkish Lira will likely go much lower, though, before it picks up again.
The Bottom Line on the Turkish Lira
Look for favorable – or at least not harsh – statements from the White House to gauge when the moment to consider buying Turkish Liras might be, in expectation of a rally when the eventual new government stabilizes.