Endgame for the Turkish Lira

By 06/08/2020News
Turkish lira

06.08.2020 – Special Report. Déjà Vu in the currency market: The Turkish Lira plunges to unprecedented depths. Ankara had previously intervened – and mowed down some shorts with a brilliant increase in overnight interest rates. But apparently speculators are not the cause of the fall in prices. It is investors who are turning their backs on the country. Let’s look at the background.

Core meltdown continues

The Turkish Lira is already weakening again: USDTRY was recently at an all-time low of 7.2671, and EURTRY was also at a record low of 8.6190. Previously, the situation for USDTRY had calmed down since the beginning of June, with the Lira moving sideways at around 6.85 Lira per Dollar. The Turkish central bank had de facto nationalised the bond market in recent months.
However, on Monday a week ago, the situation got out of control for the first time, with the lira slipping to 6.9835. Brendan McKenna, an analyst at Wells Fargo, suspected in a conversation with Bloomberg that some Turkish banks were taking advantage of remaining gaps in capital controls. However, the lira initially returned to its peg at 6.85.

Panic in the Forex Market

And on the night of Tuesday this week, things really took off: when the lira started to drift down again, the Central Bank of Turkey drastically increased the lending costs for the lira, just as it had done in spring 2019. The rate for lira overnight swap transactions in London rose from 6.8 per cent on 29 July to an incredible 1,024 basis points on 4 August. Citing two anonymous traders, Bloomberg reported that this was Ankara’s reaction to bank sales. And de facto dried up liquidity in the lira. As the current fall in prices shows, the action was ultimately in vain.

Chart analysis prevails

Told you so: Already months ago we had pointed out that with EURTYR and USDTYR a gigantic cup-with-handle formation is forming. According to the basics of chart analysis, this is usually concluded with a sideways trend and then a final selloff. Exactly this could be the case now – the sky is the limit.

Imperial policy in Ankara

It is probably not short-term short positions that are the reason for the decline in the lira. But rather a massive flight of capital by frightened investors. The “Financial Times” recently stated that foreign investors had fled the country, that they had withdrawn large volumes of foreign exchange from domestic currency bonds in the past twelve months.
A few days ago we warned you about the neo-imperialist policies of President Recep Tayip Erdogan and the consequences for the financial market. By this we did not mean the reopening of the Hagia Sofia in Istanbul as a mosque, ending the “age of interruption” – next destination Jerusalem. But rather the unilateral extension of the maritime borders in the Mediterranean. According to Erdogan’s interpretation, Turkey is entitled to a huge area under water, which continues the Turkish continental shelf. Unfortunately, this “Mavi Vatan”, i.e. the Blue Homeland, also includes some Greek islands. Erdogan recently wanted to drill for gas in the Greek Exclusive Economic Zone (EEZ) off the coast of Crete, which is covered by international law. And was stopped at the last second by the European Union and NATO. The USA has also risen behind Athens.

How many wars does Turkey want?

But postponed is not cancelled. If Turkey asserts its claims, it is threatening war with Greece. Meanwhile, the Hellenic Navy is going mobile, media such as Greekcitytimes.com called on its readers not to post photos of departing Greek warships in the social media. In addition, Europe and America are threatening sanctions against Turkey.
It is also possible to take up arms with Cyprus and Israel – because the two states, together with Athens, want to build a gas pipeline past the southern Cretan coast to Italy and would thus cross the area newly claimed by Turkey. As if that wasn’t enough, Turkey is involved in the Libyan civil war, thereby calling Egypt into action. Turkish troops are also stationed in Syria.

Full speed ahead towards national bankruptcy

Three military trouble spots at once – this is expensive for the state treasury; the printing press is rotating. Especially since tourism, which brings in foreign exchange, has collapsed in the wake of the Corona crisis. The end of the story: at some point Turkey will run out of the dollar reserves that support the lira. Admittedly, Ankara can wipe out one or two shortie with punitive measures such as the recent sudden increase in the swap rate. But given the horrendous foreign policy, it is likely that the country will remain unattractive for foreign investors. It looks a lot like a “final countdown”.

Possible assistance from China

And that could mean the mixed situation for traders and investors: Turkey might be able to get credit, for example from China. Beijing should be happy about access to Mediterranean ports in return for a large dollar remittance. Then the lira should rise. However, if the medium-term burdens are not removed, the outlook for the currency looks bleak. It is difficult to imagine that the grab for energy reserves in the waters of other countries will be successful.
However, if the situation eases and Turkey gains access to oil and gas through negotiations; or if Turkey reasonably prefers to start producing energy in undisputedly Turkish areas of the Black Sea, new petrodollars will bubble up and the lira will rise. If not, three wars at once will mean the end of the currency. And, by the way, the Greek and Turkish stock markets are under heavy pressure. We keep an eye on the matter for you – and wish you successful trades and investments!

Important Notes on This Publication:

The content of this publication is for general information purposes only. In this context, it is neither an individual investment recommendation or advice nor an offer to purchase or sell securities or other financial products. The content in question and all the information contained therein do not in any way replace individual investor- or investment-oriented advice. No reliable forecast or indication for the future is possible with respect to any presentation or information on the present or past performance of the relevant underlying assets. All information and data presented in this publication are based on reliable sources. However, Bernstein Bank does not guarantee that the information and data contained in this publication is up-to-date, correct and complete. Securities traded on the financial markets are subject to price fluctuations. A contract for difference (CFD) is also a financial instrument with leverage effect. Against this backdrop, CFD trading involves a high risk up to the point of total loss and may not be suitable for all investors. Therefore, make sure that you have fully understood all the correlating risks. If necessary, ask for independent advice.

CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 81% of retail investor accounts lose money when trading CFDs with this provider.
You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.