The shortfall of the Turkish Lira (TRY)

Staggering numbers and facts at the beginning. This year alone the TRY lost almost 40 % against the USD. On one year 46 %, on four years 163 % and since the financial crisis in 2008 more than 600 % against the USD value. Record low after record low for the currency of the Turkish Economy.

Turkish Lira crash Lukas Kuemmerle

Besides that, the inflation forecast for 2020 was increased to 12.3 percent and the central bank has to find middle ground between rising rates to stabilize the currency and to cut rates to keep the economy going.

But why is the TRY so vulnerable and one, if not the worst performing currency, when it comes to more developed emerging market currencies?

There are plenty of factors for the latest shortfall and the overall weakness in the currency

  • tensions between Greece and the interest in the Libyan oil reserves

  • tensions between France and Turkey

  • a central bank which currently only knows how to disappoint market participants

  • general lack of trust in the national central bank and the Turkish government

  • the developing consequences of the ongoing global pandemic, which also plays its part to high unemployment and high inflation

Turkey’s central bank governor Mr. Uysal argued that the bank already had implemented “strong tightening” in monetary policy.

But those measures disappointed both Turkish and foreign investors, after the bank decided to raise the cost of borrowing through an obscure emergency facility rather than the main interest rate, which the market participants hoped would happen.

Besides those general, structural problems we’re back in a surging Covid-19 case numbers and renewing restrictions environment, which leads to deducting liquidity from high yielding emerging market currencies, like the Lira, and putting it into safe haven currencies, like the USD or the JPY.

From a higher standpoint we have to summarize that we need to see some structural changes in the central bank policy making and less influence of the Turkish president Recep Erdogan before the currency gets more attractive again. Central Banks have to implement and make decisions based on values of a national central bank, not on interests and the influence of a single politician.

The overall macroeconomic picture is more vulnerable and uncertain, given rising inflation and unemployment. The impact of the Covid-19 crisis is expected to have a severely negative effect in Turkey, further weakening economic and social gains.

Nevertheless I see big potential in the Turkish Lira, when we see first signs of reversing these trends. Definitely a pick for a watchlist, if you want to participate in the Turkish economy in the long term. For now my outlook stays bearish and the Lira should have more room to fall even further against the Dollar in the current economic environment and the fear of a double dip global recession.