By Alex Eliades
FX traders everywhere have seen the Turkish Lira plummet to record lows versus the US Dollar since the government scandal in which several ministers and hundreds of Government officials were arrested on charges of corruption. The result has been a massive impact on international confidence in the Turkey’s government and has severely affected an already dwindling currency.
The Turkish Lira had seen massive drops in the past 25 years before recent events. Bloomberg started tracking the USD/TRY currency pair back in 1981 and since then it has never been as low as it is these past days. On my MT4 chart which goes back to 1999 I can see you got change from 1 Lira when you purchased 2 dollars. In contrast today you will need nearly 5 Lira to purchase 1 dollar.
Increases in consumption taxes have been announced, which reduced the likelihood increasing the interest rate devaluing the currency further. The consumption tax hike could add to inflation this year making the Lira a bad currency to hold on to. Turkey also has a very large current-account deficit which contributes to the vulnerability of the Lira.
In order to stabilise the currency the Turkish central bank sold off some of their dollar reserves and other foreign currencies and had spent about $15 billion doing so. This provided some stability and has slowed the currency devaluation but it has not halted it completely and volatility continues. It is projected that the central bank will spend another $6 billion before the end of the month. Turkey has less than $40 billion in foreign exchange reserves so the central bank cannot safely spend much more in order to preserve the Lira.
The US Federal Reserve’s move to cut their monetary stimulus has affected some of the leading emerging economies, which has mounted more pressure on the Lira. In 2013, the Turkish Lira fell against the dollar by 17% and this trend appears to be continuing into 2014.
Foreign investors were not so long ago heavily investing in Turkey and other emerging economies during the boom and while developed economies were flat. However, as the developed economies start recovering and show signs of higher yields investors are pulling back from emerging markets like Turkey.
Economically speaking, on top of everything else the political scandal could not come at a worse time for the Turkish Lira. With local elections due in March this is a critical time for the leading AK political party. The central bank is independent of the Government but the political part still has strong influence over the organisation. It is very likely that any stiff policies that are due to come out of the central bank due to the crisis will be delayed to after the elections in March.
Interestingly Turkish Energy Undersecretary Metin Kilci made a public statement announcing that natural gas prices would not be raised this year. This is a very bold statement given the fact that Turkey has to import all of its natural gas and as the Turkish Lira devalues the local price of the gas increases accordingly, irrespective of global price rises. Analysts believe that it is likely that an increase in gas prices of at least 15% are due as prices have been keep constant since October 2012 and in that time the cost of gas to the Turkish has increased significantly.
Foreign currency traders are looking at the USD/TRY price plummet with great caution as it’s very difficult to predict stability or where the devaluation will end. However, if traders can gauge it right there is the potential to make a lot of money.
Alex works for XGLOBAL Markets, which is a brokerage firm specializing in Forex, CFDs and Metals trading. He is a columnist for a popular financial newspaper, blogs on topics that include financial markets, growth hacking and has written a list of academic papers.