Forex traders brace for Erdogan’s election chaos

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Turkish flag on a DenizBank building. Turkey is expected to go to the polls on Sunday.

Ismail Ferdous | Bloomberg | Getty Images

THE turkish lira is already facing some of the most volatile conditions in global currency markets ahead of the country’s historic election this weekend, with traders predicting a likely meltdown if incumbent Recep Tayyip Erdogan retains his presidency.

The lira is currently trading at record highs of 19.56 against the American dollars – and market watchers predict it still has room to dive.

Turkey holds its presidential and legislative elections on Sunday. If Erdogan wins, the Turkish lira is “highly likely to collapse within months,” Cribstone Strategic Macro consultancy founder Mike Harris told CNBC.

“Ultimately, the lack of investment confidence will mean that the Turkish lira is likely to be among the worst performing currencies in the world for some time to come,” he said.

This is largely due to the unorthodox economic policies of the current president.

“For several years, under Erdogan’s wacky monetary ideas, the Turkish lira has been extremely volatile and in a state of crisis,” he said. Steve H. Hanke, who is a professor of applied economics at Johns Hopkins University.

The Central Bank of the Republic of Turkey did not immediately respond to a CNBC request for comment.

Turkey’s monetary policy prioritizes pursuing growth and export competition over fighting inflation. Erdogan endorses the unconventional view that raising interest rates increases inflation, rather than controlling it.

The president’s refusal to raise rates was instrumental in the pound’s historic fall from less than 4 to the dollar in 2018 to 18 to the dollar in 2021.

“Concerns over actual election uncertainty and then uncertainty over a potential change in government and how they might handle FX are driving the sharp rise in FX volatility to this 42.7 level. %,” said Paresh Upadhyaya, portfolio manager at Pioneer. Investments, which added that the pound’s volatility rate hovered around 10-12% in December.

“If Erdogan wins, which is our base case, USD/TRY could rise to 23.00,” Wells Fargo emerging markets economist and FX strategist Brendan McKenna wrote in an email.

“The lira is heavily overvalued following the intervention efforts, and depending on the direction of the election, the currency could move sharply in either direction,” McKenna said.

A “very clear rally” if the opposition wins?

Erdogan’s biggest challenger is Common Opposition candidate Kemal Kilicdaroglu, who has pledged to restore orthodox economic policies and calm Turkey’s skyrocketing inflation rate.

And if the opposition emerges victorious, the lira will start to strengthen, at least initially, Upadhyaya said.

“It will mean that the central bank of Turkey will regain its independence, that it will have the full mandate to pursue traditional economic policies,” he said.

Higher interest rates would help reduce the country’s inflation rate, lead to a “pretty severe recession” and help shore up foreign currency reserves that have been depleted trying to defend the lira, he said. he continued.

In a regime change scenario, the pound could see a further decline in the very short term as FX intervention efforts come to a halt, but in the longer term it could experience a very strong recovery.

Brendan McKenna

Wells Fargo Emerging Markets Economist

However, any acute positive reaction will be short-lived, according to a Commerzbank report of May 9.

“The coalition is made up of small parties, which only came together to oust Erdogan,” wrote the bank’s senior emerging markets economist, Tatha Ghose.

“Market enthusiasm could wane if the coalition were to run into problems with cooperation or policy implementation, which would remind markets that Erdogan can return to power,” the report said.

Despite this, Wells Fargo’s McKenna anticipates a more optimistic long-term outlook for the currency.

“In a regime-change scenario, the pound could see a further decline in the very short term as foreign exchange intervention efforts come to a halt, but in the longer term it could experience a very strong recovery.”

Market offline

Turkey is currently struggling with an inflation rate close to 50%, after breaking a 24-year high of 85.51% last October.

Whether the pound plummets or regains ground, the impact is still likely to be contained domestically.

“Turkey is now a mostly disconnected market with much smaller flows and no real international participation,” Ghose told CNBC in an email. Similarly, Upadhyaya from Pioneer Investments does not provide any side effects.

“I don’t expect any contagion effects affecting other emerging market currencies or even G-10 currencies,” he said.



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