Turkish Lira in difficult waters

This year, the Turkish Lira has to date made no headway. On the contrary, the currency has lost a good 10% against the Euro since the beginning of the year. The list of factors dragging it down is anything but short. Global trends play a role, admittedly, but this should not detract from the fact that the major challenges to the Lira are to be found on the home front and, as was the case last summer, the difficulties are indeed home-grown. Against the backdrop of the annulled results of the local elections in Istanbul, investors have become ever more concerned that Turkey under Erdogan is distancing itself (still) further from basic democratic principles. It is precisely these worries that are damaging the reputation of the Turkish central bank, on top of which diplomatic relations with the US are tense. Washington is threatening that the NATO partner will face consequences if it does not cancel its purchase of a Russian air defence system.

The 23 June will be a big day for the Turkish Lira, as this is when the rerun of the Istanbul local elections will take place. President Erdogan will hardly be able nor want to show any signs of weakness during the election, and he will presumably create a pretence of being accordingly uncompromising toward his political opponents inside the country and toward the USA. The political uncertainty therefore looks set to remain at the current high level for the time being – and may actually increase further.

How things then go for both Turkey and its currency lies first and foremost in the hands of President Erdogan. The crisis of last summer showed quite clearly how swiftly tension can ease if the right (diplomatic and monetary policy) foundations are laid. By contrast, any further escalation would not only exert additional selling pressure on the Lira but could potentially have a knock-on effect on the entire emerging markets segment.

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