Trading the Turkish Lira: Crossroads Ahead?
Trading the Turkish lira requires a careful approach if a beginner trader decided to include it in a trading strategy. The Turkish currency’s value has been affected by the central bank’s monetary policy decisions which have occasionally sparked discussions among analysts in global markets. In this blog, we will share some valuable insights regarding trading the Turkish lira to help beginner traders make informed decisions.
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Turkish Lira Fundamentals
The Turkish lira (TL - code:TRY) is the official currency of Turkey. The Ottoman lira, its predecessor, was introduced in 1844 and was replaced by the Turkish one in 1927. In past decades, the Turkish lira had been pegged to the British pound, the French franc and the US dollar. The Guiness Book of Records ranked the Turkish lira as the world's least valuable currency in 1995 and 1996, and again from 1999 to 2004.
According to the World Bank, “Türkiye is the 19th largest economy in the world, with a GDP of roughly $906 billion. However, productivity growth has slowed as reform momentum has waned over the past decade, and efforts have turned to supporting growth with credit booms and demand stimulus, intensifying internal and external vulnerabilities. High private sector debt, persistent current account deficits, high inflation, and high unemployment have been exacerbated by macro-financial instability since August 2018.”
How has the Turkish Lira Reacted to Monetary Policy Shifts?
A person who traded the Turkish lira against the US dollar during the third quarter of 2021 would probably never forecast the lira’s value drop. On August 1st 2021, one US dollar was equal to 8.3 Turkish liras, as shown on the monthly chart below.
Date Range: May 1st 2018 – 6th July 2023. Date Captured: July 6th 2023. Past Performance is not an indicator of future results.
Ever since then, it is all about the US dollar strengthening against the Turkish lira, with the exchange rate reaching $1 = TRY 26.04 on July 6th.
Date Range: January 16th 2023 – 6th July 2023. Date Captured: July 6th 2023. Past Performance is not an indicator of future results.
The Turkish lira has weakened almost 28% in the first 6 months of the year on the back of unorthodox financial policies as some economists suggest. On June 22nd, the Central Bank of Turkey (CBRT) announced its decision to raise interest rates by 650 basis points, which was the first rate hike since March 2021.
However, the central bank’s action didn’t satisfy investors as most economists expected a 1,150 basis points hike.
Trading the Turkish Lira: Central Bank to the Rescue?
High inflation figures and the Turkish lira’s declining value have tormented consumers in the last few years. Unable to follow the rise of prices, they tend to reduce their purchases and reevaluate their budget spending. Turkey’s Consumer Price Index (CPI) and Producer Price Index (PPI) for June eased to 38.21% and 40.42% on a yearly basis according to data coming from the country’s statistics service.
It should be noted that Hafize Gaye Erkan has been named governor of the Central Bank of Turkey, an institution expected to play a key role in efforts to boost the country’s crisis-hit economy. Erkan is also the first woman to head the Central Bank of Turkey, demonstrating a robust CV with working experience in some of the largest banks in the US.
After the last rate hike on June 22nd, the central bank’s board noted in a statement: “The Committee decided to begin the monetary tightening process in order to establish the disinflation course as soon as possible, to anchor inflation expectations, and to control the deterioration in pricing behaviour.”
Turkish Lira Trading and Analysts’ Forecasts
ING analysts suggest that annual inflation dropped in June amid a better-than-expected monthly reading, but the downtrend since October seems to be coming to an end. In a report published on July 5th the Dutch bank’s analysts suggested that “potential adjustments in administered prices could also boost overall inflation. On the policy front, the equilibrium point in exchange rates and interest rates has yet to be seen given signs of a gradual policy approach which implies that a pivot to more conventional policies will take time. Going forward, market participants will be focusing on the government’s new Medium-Term Program which is reported to be announced in September.”
Goldman Sachs analysts suggested that the Turkish lira could weaken to 28 to the dollar in 12 months compared with a previous prediction of 22. However, its economists were caught by surprise in the first ten days of June when the Turkish lira lost more ground than expected. In their report (June 3rd), they had noted that “we think it is a question of when rather than if the currency weakens significantly, with the probability of a larger one-off adjustment having increased. We believe the choice of Mehmet Simsek as the new treasury and finance minister increases the likelihood that monetary policy will shift towards a more orthodox direction.”
Murat Okcu, a professor of economics at Suleyman Demirel University, speaking to Al Jazeera financial reporters, suggested that “the industry is prepared for a 25 lira to the US dollar exchange rate. In fact, even a dollar exchange rate between 25 and 28 lire will not be seen as an anomaly,” adding that the lira should not be expected to reach the pre-2014 value level.
Analysts at MUFG stressed the shift in monetary policy by the central bank and noted the need for regaining credibility. In their report they write: “In June the Turkish lira weakened sharply against the US dollar in terms of London closing rates from 20.701 to 26.063. The Central Bank of Turkey (CBRT) raised the one-week repo rate by 6.50 percentage points to 15.00%. It is now important for policymakers in Turkey to regain credibility amongst foreign investors who have sharply cut back exposure to Turkey. It will take time to regain investor confidence given fears that the policy reversal could prove short-lived given it will involve a painful adjustment for the economy.”
Managing Your Risks When Trading the Turkish Lira
Trading the Turkish lira requires attention as the Turkish currency has recorded significant fluctuations in the last few years which could work in favour but also against your goals, depending on your strategy. The ups and downs of the Turkish lira certainly don’t go unnoticed by experienced traders but what about beginner traders?
Beginner traders who would like to include the Turkish lira in their strategies should browse through resources found on the internet and find out which factors move the Turkish currency’s value up or down and why. Trading without the right knowledge may hide pitfalls that could lead to loss of funds. Risk management tools provided by brokers are a way to minimise losses in case markets move against you.
Learning how to use risk management tools is essential for beginner traders. People who start their trading journey now should study educational materials such as e-books, blogs, webinars and other videos to strengthen their knowledge. Risk management tools can improve the trading experience by reducing your stress while you focus on designing the best possible strategy.
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This material does not contain and should not be construed as containing investment advice, investment recommendations, an offer of or solicitation for any transactions in financial instruments. Please note that such trading analysis is not a reliable indicator for any current or future performance, as circumstances may change over time. Before making any investment decisions, you should seek advice from independent financial advisors to ensure you understand the risks.
