What’s next for Turish lira after elections?

Summary:

• Erdogan’s AK Party lost support in Turkey's biggest cities
• Two paths Recep Erdogan can take after the political setback
• Weak Turkish economic performance, a new economic plan to be unveiled next week
• EURTRY keeps trading slightly above its crucial technical support

Recent days have brought elevated volatility in the Turkish currency which could be associated with the local elections held in Turkey on Sunday. In anticipation of this event investors wanted to withdraw their cash (sell Turkish liras) thereby exerting downward pressure on the currency. In order to limit the TRY depreciation the central bank was shoring up the country’s currency by depleting FX reserves. However, by doing so the central bank is unable to support the currency in the long-term. Therefore, the further TRY’s performance could depend on what Erdogan will say (and do) after the elections.  

Elections’ outcome

Although the local elections seem to be less important in terms of shaping future monetary or fiscal policy in Turkey, the outcome we were offered could be seen as the huge personal setback for Recep Erdogan. His AK Party lost control in 7 out of Turkey’s 12 biggest cities signalling. It could have been a signal that an unorthodox notion shared by Erdogan (inflation can be tamed by reducing rates) acted to the detriment of his party. Taking into account a lot of disruptions caused directly or indirectly to the economy by Erdogan one may suppose that the local elections’ outcome could be positive in the long-term. Nevertheless, the next general elections will not hold until 2023.

What Erdogan can do next?

Having in mind that Erdogan is rather unaccustomed to defeat one may assume that he should take appropriate steps to improve the AKP’s position. He seems to have two ways he can follow - either continue his current populism or embrace a more market-friendly position leading to necessary economic reforms and thereby restoring confidence in the economy. If he changes his mind and chooses to take the latter way, it could act in favour of the economy. He has yet to refer to the political setback.

Weak economic foundations

The Turkish economy has experienced tough months being a result of the currency crisis we had last year. In the wake of the sudden TRY depreciation inflation spiked leading to an array of unwanted repercussions - economic growth evaporated, external debt rose sharply, industrial production plunged. Since then, the central bank - being under significant pressure of Recep Erdogan - has adopted a more hawkish stance by lifting interest rates. Nonetheless, the lag between inflation developments and a step taken by the Turkish central bank led to stagflation and it could take time to get things sorted out anew. In the nearest future a lot will depend on a new economic plan scheduled to be unveiled by Finance and Treasury Minister Berat Albayrak next week. Keep in mind that markets could be on tenterhooks until either a new economic plan is unveiled or Recep Erdogan refers to the elections’ outcome.

Technical analysis

The EURTRY is moving above the important trend line as evidenced by the chart above. The key support could be localized in the vicinity of 5.94 while the first more notable bulls’ obstacle might be found at around 6.74. Source: xStation5