Currency watchers who have been following the trials and travails of the Turkish Lira (TRY) will be accustomed to negativity by now. Following a currency shock in 2018 that saw the Lira lose as much as half of its value against the US Dollar, partly the result of a financial crisis triggered by disputes with the United States government, the Lira has been facing a steady decline since.
Despite attempts by the Central Bank to revive the flailing currency by pumping the market with foreign currency reserves and even imposing a suite of capital controls throughout 2019, there is little to suggest that improvement is on the horizon.
By all accounts, the first weeks of 2020 have been bruising for the Turkish Lira, particularly when examining its relationship with the US Dollar (USD) and British Pound Sterling (GBP). In spite of a slight uptick towards the end of 2019, the Lira is currently sitting at its lowest point in almost a year, at around 6.1 to the Dollar.
Compare this to the start of 2018, when the Lira stood at 3.15 to the Dollar, and it’s clear that the Turkish economy still has a lot of trouble ahead. Much of the current currency spiral can be connected to tensions in neighbouring Syria, which are having an adverse effect on the Turkish economy and causing a further drain on the Central Bank’s resources.
Measures put in place in January by the Central Bank to help cover the cost of Turkey’s military policies and control inflation have led to the Lira losing a further 2% of its value in 2020, which is nonetheless modest compared to the losses seen in the previous two years.
However, forex traders who follow the Lira should be aware of a number of upcoming developments that look set to have a potentially significant impact on the value of Turkey’s ailing currency. Political and economic events and developments often have the strongest impact on currency values and pairs. Those wishing to learn more on what is forex are advised to read up on how even something as minor as a country’s employment rate can have a significant impact on the value of its currency. These are the things that forex traders typically keep an eye out for when speculating on pairs, as it helps them to make more informed decisions on their trades.
The first major development already having a considerable impact is the decision by the Turkish Central Bank to slash interest rates even further than they already have done. Although the rate decision is not expected until the end of February, the run-up to the decision has shaved 0.4% of the value of the Lira against the Dollar, as investors take the impending cuts as a sign that confidence in the economy is wavering.
In addition, much of the spring and summer months will likely see the Lira take a further battering, as Turkey’s finances become increasingly entangled in the Syrian war. Unless the area around the country’s border returns to stability in the near future, investors will likely continue to see Turkey as a risky bet, which will likely degrade the value of the Lira.
Most importantly, anything that happens to the Lira in the coming weeks will largely depend on the decisions made by the country’s president, Recep Tayyip Erdoğan, who is known to have an outsized influence on the Finance Ministry and the Central Bank.
In the past, Erdoğan has been strongly in favour of capital controls to prevent the flight of money out of the country, which he believes is impeding the recovery of Turkey’s economy. However, as the past year has shown, the introduction of controls has not been kind to the Lira, with every recent announcement of controls being swiftly followed by a nosedive in the value of the currency.
It is worth noting that the Central Bank has managed to dig Turkey out of a short-lived recession, which it entered in March 2019. However, recovery has hardly been robust since Turkey returned to growth, with GDP growth rates sitting at a quarterly figure of around 0.6%.
There are few signs that the economy – and, by extension, the Lira – will see any significant gains in the near future. In fact, all of the current evidence suggests that more losses are imminent, although these are unlikely to be as severe as those seen last year or in 2018. As with all economic quagmires, things must get worse before they get better. However, Lira-hawks will be wondering just how much worse things will have to get first.