Fundamental Analysis: Lira’s New Seven-Month Lows

Fundamental Analysis: Lira’s New Seven-Month Lows

The Turkish lira has made more losses today against most currencies amid pressure on emerging markets. The other crucial factor is the higher likelihood of an extended period of political instability in Turkey. Turkish data however has been mixed recently, with inflation actually declining slightly.

In a dramatic movement during the early afternoon GMT, the dollar surged past the major psychological level of ₺6. USDTRY reached seven-month highs earlier today around ₺6.04 before declining slightly at the time of writing. The picture was similar for EURTRY and GBPTRY at ₺6.74 and ₺7.88 respectively.

Threats of more tariffs; Turkey investigates electoral fraud

Emerging currencies in general as well as the lira in particular have been hit by the latest news of the trade dispute between the USA and China. The American President Donald Trump took to Twitter last night to threaten more tariffs against China. He followed up in the afternoon GMT today with more complaints about (sic)‘losing, for many years, 600 to 800 Billion Dollars a year on Trade.’

The possibility of more tariffs and higher likelihood of Sino-American talks breaking down is a strong negative for emerging currencies like the lira. This is because of the vulnerability of Turkey and similar countries to outflows of capital during periods of higher risk.

Meanwhile in Ankara, Turkey’s Supreme Election Board (‘YSK’) might conclude its series of investigations this week. The ruling AKP’s candidate in March’s local elections in Istanbul lost to the opposing CHP’s nominee by a very small margin. Alleged fraud has been a source of anger ever since. However, the war of words between the two parties escalated at the weekend, with President Erdogan saying that he favors a rerun of the elections in Istanbul.

Political instability in Turkey tends to have a strongly negative effect on the lira because of Turkey’s reliance on foreign investment. Turkish assets like bonds and shares look much more risky during periods of elevated political tension, lowering demand for TRY.

Turkish data mixed but inflation declining overall

Last week’s economic releases from Turkey indicated a mixed picture in general. Manufacturing PMI declined slightly to 46.8 against the previous 47.2, indicating a larger contraction in Turkish factories’ activity. Producers’ prices also increased more than expected, with the annual figure moving back above 30%, the highest since January.

Despite these negative figures, important data on inflation was slightly better. Annual inflation adjusted for April decreased to 19.5%, the lowest since August of last year. On the other hand, food inflation continued to rise.

Focus on the YSK and trade wars this week

Traders’ eyes are likely to remain on the YSK this week given Mr Erdogan’s recent comments about rerunning the elections in Istanbul. The board’s final verdict on fraud could come as early as this afternoon; however, tomorrow or Wednesday might be more likely.

Trade talks - or perhaps lack thereof - are in view as well. Confirmation from China of a delay in the talks would be likely to affect the lira and other emerging currencies very negatively. On the other hand, a climbdown by President Trump could reduce the pressure on TRY.

More losses expected for the lira

The outlook for the lira is poor based on fundamentals, suggesting that an ongoing downward movement this week might be favorable. The strength of this is likely to depend on news from Ankara and Sino-American trade talks. However, traders should pay attention to the technical picture as well. If USDTRY fails to close above 6.00, this area could be strengthened as resistance.

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