The last 16 months have been turbulent for Turkish lira, with currency depreciating sharply against the backdrop of geopolitical uncertainty and proposed economic reform. Last October, the currency reached a new low against the pound, having declined by an estimated
90% in a little under 12 months.
The New Year has brought little relief so far, with the Turkish lira remaining extremely volatile and continuing to decline against a raft of major currencies. It declined by a hefty 5% against the U.S. Dollar on 28th March, for example, whilst continuing to underperform in relation to the pound.
In this post, we’ll look at the reasons behind these fluctuations in Turkish lira, whilst asking how traders can look to profit accordingly.
Why is the Lira Declining?
In truth, Turkey’s currency has declined in line with its economy, with the nation having struggled to overcome a number of challenges in recent times.
One of the biggest issues facing the Turkish economy is rising inflation, which continued to spiral out of control during 2018. Whilst it may have retracted to 19.71% last month, it peaked at 25% in October and this has had a dramatic impact on the value of the nation’s
More specifically, nations that exhibit a consistently high rate of inflation will see the purchasing power of its currency decline, particularly in relation to those of its key trading partners.
This also has a knock-on effect for trade and imports, which are also undermined the prospects of economic growth in Turkey. More specifically, a devalued currency tends to increase the cost of imports considerably, and this has contributed to a troublesome foreign trade deficit that saw an annual decline of 59% last August.
The flip-side of this is that exports in Turkey have boomed, but a widening trade deficit is something that remains indicative of a strained currency.
How have Turkey Responded and how can Traders Capitalise?
Turkey’s Finance Minister Berat Albayrak has recently announced that there remain positive portents for the national currency, whilst he has also outlined an economic reform package that’s aimed at reviving growth, lowering corporation tax and tackling inflation.
At the heart of these reforms is a plan to give state banks 28 billion lira ($4.92) of debt securities in a bid to strengthen their capital positions.
This could also contribute to a quantitative easing program, which may lower inflation and boost the value of the lira over time.
Along with the reduction of corporation tax, there’s a clear and obvious drive to create a more balanced and competitive economy that encourages business growth and a stable national currency.
The window to profit from the volatile Turkish lira remains open for now, however, with these proposed reforms having triggered a further slide against the dollar and a 1% drop on average. After all, the proposed reforms will impact on the economy and create further uncertainty in the short-term, enabling traders to profit with the right currency pairings.
Clearly, backing the GBP/TRY is a viable option, with one pound currently worth 7.51 Turkish lira according to Oanda. This valuation remains somewhere between last October’s peak and a recent low at the end of December, but despite offering immediate value to traders it’s important to factor in the longer-term impact of Brexit and UK’s departure from the EU.
The pound has rebounded recently amid news of an agreed extension to Article 50, but these gains would quickly be lost in the event of a no-deal Brexit.
With this in mind, the USD/TRY pairing may offer greater long-term value, particularly given the relative strength of the greenback. Even though this pairing fell marginally to 5.6800 at the end of last week, it’s likely to deliver more consistent returns over the course of the next financial quarter.