Turkish Lira Goes into Free Fall

Adam Lemon

President Erdogan’s Speaks

The Turkish lira has been falling steadily and significantly in value for several years, although the devaluation has accelerated massively over the past 18 months. The Turkish lira has lost over half its value against a basked of currencies since the start of 2020 alone. Just last week, the lira fell by about 10% against the US dollar.

It was against this backdrop of a mounting sense of major crisis for the Turkish economy that President Erdogan spoke earlier today on the subject. Although the Central Bank of the Republic of Turkey (TCMB) is nominally functionally (if not goal) independent, most analysts believe it is clear the Bank is subject to orders from President Erdogan. The president has what can fairly be described as very unorthodox beliefs about monetary policy and has previously stated that there is no need to raise the interest rate to support the relative value of a currency, as in his view higher interest rates cause higher inflation. He has also denounced what he calls the “interest rate lobby” in previous speeches. The TCMB has recently made sharp interest rate cuts despite the weak lira, cutting its interest rate for the third month in a row last week.

President Erdogan today defended these rate cuts, stating these cuts will boost economic growth and help to create jobs. The Turkish lira reacted by dropping by as much as 10% against the US dollar in a matter of hours, with the USD/TRY currency pair trading briefly at an all-time high of 13.50.

USD/TRY Monthly Price Chart

Forex Brokers Suspend Turkish Lira Trading

While this rapid depreciation has meant a great deal of pain and anxiety for individuals and businesses in Turkey who are struggling to get by or to finance foreign currency loans, it has been an opportunity for traders, who have long seen the declining Turkish lira as the ultimate trend trade. However, there have always been challenges in being short of the lira at a Forex broker: high spreads and massive overnight swap rates, coupled with high volatility and sudden counter trend movements, can make this a challenging currency to trade despite the trend.

Despite such pitfalls, the size and speed of the depreciation has given an opportunity for profit. This opportunity seems to have ended since Erdogan’s speech when several Forex brokers suspended trading in the Turkish lira. It is unclear whether old trades will be honoured or paid out at the rate prevailing at the currency’s trading suspension. Only a minority of Forex brokers offer trading in the Turkish lira.

What Does This Mean for Traders? 

At the time of writing, the crisis is at a peak, and it is very unclear what will happen next. It seems likely that the lira will remain suspended at most brokers for the rest of today. This should be a reminder that retail Forex and CFD brokers are not obliged to make a market in anything if they do not want to. To be fair to them, if liquidity in the lira is drying up, they may have no real means to make a market while controlling their own risk.

Quite often after these sudden climaxes, a way is found to temporarily stabilize the currency, and so it may be that the big opportunity to short the Turkish lira has passed. It will be worth keeping a close eye on what happens over the coming days.

Adam Lemon

Adam Lemon began his role at DailyForex in 2013 when he was brought in as an in-house Chief Analyst. Adam trades Forex, stocks and other instruments in his own account. Adam believes that it is very possible for retail traders/investors to secure a positive return over time provided they limit their risks, follow trends, and persevere through short-term losing streaks – provided only reputable brokerages are used. He has previously worked within financial markets over a 12-year period, including 6 years with Merrill Lynch.
Learn more from Adam in his free lessons at FX Academy

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