Turkish Lira Down 26% Over One Week
My tip last Thursday to look at short selling the Turkish Lira was well-timed, with that currency falling by an incredible 15.63% over the course of the very next day. It is extremely rare for a national currency to move so dramatically in such a short period of time, and it is a sign of a serious crisis between Turkey and the United States. The Turkish Lira has been in trouble for a long time, though, falling by more than 80% in value against the U.S. Dollar over the past ten years. Yet these days are seeing its worst short-term declines of all time. What is going on?
Turkey’s economy has some serious (but by no means insurmountable) problems. Add to this President Erdogan’s appointment of his son-in-law as the head of Turkey’s central bank and the President’s rhetoric against the “interest rate lobby” and you start to see why shorting the Lira at a time when inflation is 15% and interest rates are just under 18% and the price moves against it by more than either figure in one day, as the U.S. slams tariffs on Turkish metal exports, begins to look like a very attractive proposition. The Turkish Central Bank seems completely unwilling to raise rates which makes the Lira a sitting duck for currency speculators. Last Friday’s sudden fall was triggered when, with a serious political dispute brewing between President Trump and President Erdogan over a detained American pastor, Erdogan gave a defiant speech with Islamist and anti-American overtones. This speech itself caused the currency to drop sharply, but President Trump’s tweet a few minutes later announcing punitive 20% import tariffs on Turkish metals was the knockout blow, sticking the knife in and putting the Lira down by almost 20% on the day at one point.
Neither President Trump nor President Erdogan are known for backing down from their respective political positions. President Erdogan has given some strong hints that he may reorient Turkey away from NATO and towards Iran and Russia as a response. He will have to produce a very special move now to avoid the total collapse of the Turkish Lira over the next few days as a full-blown crisis seems set to erupt.
It is also important to remember that a collapse of the Turkish currency and banking sector would cause wider problems, and European bank shares and the Euro itself have already been clobbered in the market. This is likely to continue and to worsen. Additionally, there is a strong “risk-off” tone, with money flowing into safe-haven assets such as the Swiss Franc, U.S. Dollar and Japanese Yen, and flowing out of riskier assets such as the Euro, British Pound, and commodity currencies. The Euro looks most vulnerable. Latest rumors at the time of writing suggests that the European Central Bank is worried about the exposures of BBVA, UniCredit, and BNP.