09.05.2023 – Turkey votes, many traders are now looking at the lira. Whether the decline continues is mainly a question of monetary policy. If the unspeakable Erdoganomics ends, then there is hope for a resurgence. If not, the only option at some point will probably be monetary reform.
A weekly chart like a mountain: Steadily, USDTRY is going uphill, which means that the Turkish lira is falling further and further. But things are anything but boring: the election on May 14 could bring momentum back into the forex market. Especially since now and then the state has intervened via the Turkish central bank. And by drastically ramping up interest rates for overnight lending killed a few shorts. For example, at year-end 2021, you can see that well from the jag. At such times, savvy traders rub their hands.
Source: Bernstein Bank GmbH
Should the old President Recep Tayyip Erdogan also be the new one, such blows to the lira pessimists are always possible. Only if the autocrat is replaced, there is hope for the lira bulls. That’s because Erdogan is the only person in the world convinced that lower key interest rates will help if the currency falls. Economists derisively call these views “Erdoganomics.”
Erdoganomics and Galloping Inflation
The pay and wages of the bureaucracy are paid for by cranking up the printing press. Companies are expected to borrow and invest at low interest rates. Ergo, inflation is galloping: According to Statista, the average inflation rate in Turkey in 2022 was a staggering 72 percent. For the current year, the statisticians forecast around 50 percent. In contrast, the key interest rate is downright measly: It was lowered by 0.5 percentage points to 8.5 percent in February. Low interest rates are also supposed to signal that everything is fine in the country.
Grandstanding on the Bosphorus
What is not the case: saber rattling in the Mediterranean against Greece; the attempt to shift the maritime borders unilaterally, thereby a threatening war for natural gas with Hellas, Cyprus, perhaps Israel. Hence naval rearmament – Turkey has just commissioned a helicopter carrier. And military adventures in Syria. Then there is the devastating earthquake damage, which is partly the result of botched construction due to rampant corruption on the Bosporus. All of this is not necessarily conducive to attracting tourists and foreign investors.
Whether opposition leader Kemal Kilicdaroglu will take power in the near future, despite the permanent economic crisis, remains to be seen. Kilicdaroglu may have a bachelor’s degree in economics and management, but he is rather uncharismatic, to put it diplomatically. Many Turks find the nationalistic ostentation of the current ruler much preferable.
Our conclusion: Perhaps economic sanity will return with an opposition election victory. Those who assume this will happen should go long and bet on a turnaround in the currency. But if Erdogan remains in power, the question is how and whether he will strengthen the Turkish lira again. Thus, it could be a fallacy to believe that the destruction of the foreign exchange will be stopped at some point. We are curious to see what happens next – and will keep you posted!
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