The Turkish Lira weakened against the Pound Sterling (GBP), and was outperformed by other emerging market currencies such as the Russian Rouble (RUB), South African Rand (ZAR) and Brazilian Real (BRL) on Monday due to increased concerns that the Turkish Central Bank is running out ways to defend the Lira ahead of June’s general election.
Other emerging market currencies firmed against the US Dollar (USD) at the start of the week as a run of disappointing data releases caused investors to raise their bets that the Federal Reserve will delay hiking interest rates until later in the year. As a result, riskier emerging market currencies were able to make gains. So far this year the Turkish Lira has lost 12% of its value against the US Dollar, a decline that has made it the worst performing emerging market currency in the world.
As Turkey’s general election draws closer, economists are growing concerned that the Turkish central bank now has limited options to defend the Lira. The bank is expected to leave interest rates unchanged at Wednesday’s policy meeting, and a rate hike is out of the question due to the slowing of the national economy.
Adding to that is the ongoing pressure being imposed by President Recep Tayyip Erdogan who has blamed the bank for not doing enough to prevent the Lira’s dramatic decline. Erdogan has repeatedly called for the central bank to cut interest rates despite stubborn inflation rates.
‘With the central bank not in a position to spend reserves or use interest rates defensively, the Lira will be at the mercy of broader US Dollar trends and market sentiment regarding election outcomes,’ said Istanbul based Finansbank.
Also weighing upon the Lira are concerns over the fate of Turkey’s economic management team. Deputy Prime Minister Ali Babacan, the leader of the team, will be unable to stand again for election due to his three-terms in the ruling government ending.
The ruling AK party is expected to win June’s election easily but there are doubts that they will be able to win enough support to enable Erdogan to change the nation’s constitution and boost his own powers. Investors are uneasy about the situation, as observers have highlighted concerns over Erdogan’s growing authoritarianism.
Looking ahead to the rest of the week the main data releases due for release will be Wednesday’s Turkish consumer confidence and Turkish central bank interest rate decision.
The US Dollar to Turkish Lira exchange rate was trading in the region of 2.7024.