TRY: between Erdogan and the rest of the world
Syria
Normally, we observe fundamentals or recent news and then come to the consequences for the respective currencies. This time, let’s make it the other way around and march from the “crime” back to the motive. So we are speaking about the Turkish lira now and how it mirrors the war in Syria, in which Turkey is directly involved.
What happened: 33 Turkish soldiers died last week during an attack by Syrian government forces, which are known to be backed by Russia. In retaliation, Turkey launched an attack by a swarm of killer drones to strike back and shot down two Syrian fighter jets. That escalated the conflict and put Turkey in even a narrower space between Europe, NATO, the US, and Russia. As a result, the Turkish lira and the Turkish stocks plunged.
Now, let’s draw the connection lines.
Lira
Technically, the USD had no problem crossing the level of 6.00 against the TRY, which was the 8-months high and an important psychological checkpoint. The ease with which that was accomplished pushes to think that for this currency pair, the USD has full control of the situation. Moreover, the USD/TRY trades now at 6.23 – the level of 18-months high, which since 2018 was touched only once – that was summer-2019. Next, there is only the resistance of 6.30 left after the 2018 crisis. That tells a lot where we are at with the USD/TRY.
So the strategic observation hints that there are fundamentals that push the Turkish lira down against the USD. And the most common explanation for that would be a higher pace of expansion of the US economy against that of Turkey. That is nothing extraordinary and is something “natural” for regional economies that cannot really compete with the US, and Turkey is definitely not alone in this failing counter standing.
Often, there is not much to do on behalf of the political and economic authorities in this respect – that’s why those are fundamentals, not easily modified or changed. Therefore, the question for Turkey is not why its currency is depreciating against the USD, but do the actions of its financial and political authorities work to revert the trend?
Erdogan
The economic science is supposed to be emotionless, impartial and somewhat impersonal, because it is about money flows, inflation, statistics, and indicators. It is pretty far away from political tension full of personal vendettas unavoidable between country leaders. But in the case of Turkey, it is hard to stay really impartial when the main thing that you hear about its leader is either military news headline or social unrest in the context of yet another religious fortification in Turkey’s governing line. It is understandable that Recep Tayyip Erdogan works to create an image of strong Turkey in the international arena, tries to restore Turkey to the level of true regional power and perhaps even go beyond that at some distant future, to keep good command between the titans of our century and make wise maneuvers between alliances with Russia, the US, NATO, and other powers. It is also understandable that the “Kurdish question” does not help to make things easy for Erdogan and that the Kurdish population south the Syrian border cannot be completely separated from its connections north, inflaming the eastern Turkey. But there are no excuses for anything if a country leader fails to advocate his causes against the question “at which cost?”.
Turkey
A recent Bloomberg’s article reflects well on the matter, giving a concise conclusion quoted below.
Source: Bloomberg
The market logic here is the same as anywhere else: when investors see that the country is more and more entrenched in exshausting and indebting military campaigns, continuously tests its international political resilience and pushes to the edge internal economic integrity and external credibiliity - they know that cannot end well. Hence, the Turkish lira stands little chance in attracting investors and loses value.
Of course, we can always find apologetic lines among Turkish patriots sympathetic to the “recklessness” of President Erdogan, as the same news agency describes him. But what’s the use of the sword if the day after you can hardly afford yourself a proper dinner? Especially if it is bought with the US dollar.
Cutting the philosophy: there is little hope for the TRY in the nearest future given the current circumstances. If nothing changes (meaning, if President Erdogan keeps doing what he has been doing so far), you may be safe betting on the USD.
P. S.
We don’t go political. Instead, let’s contemplate history a bit. Although the Ottoman Empire, which is the historical predecessor of the current Turkish Republic, saw its last days already 100 years ago, it is remembered well for its leaders. One of them was Mehmet II Fatih, the conqueror of Constantinople. He was a true warrior-emperor, feared by his enemies and praised by his descendants. But mainly, that is all he is remembered for: taking Constantinople and ending the Byzantine Empire by sword and fire. On the other side, there is another famous Ottoman emperor: Suleiman the Great. He is also known as Suleiman Kanuni, “the lawgiver”. Note an interesting fact: he was also a warrior-emperor. In fact, he was the last of such kind among the Ottoman sultans, who started spending most of their lives in harem after this great governor. But despite the fact that it is Suleiman the Great who expanded the dominions of the Ottoman Empire to its greatest extent, that is not what he is most remembered for. Instead, he is known for his economic advances and structural establishments. It begs a question: how Erdogan would be remembered if the memory of his deeds lasted 500 years?..