Over the past week, the Pound Sterling to Turkish Lira (GBP/TRY) exchange rate was trending within the range of 4.6291 to 4.7011.
Despite market volatility causing emerging market assets to fluctuate after the Federal Open Market Committee (FOMC) opted to hold the benchmark cash rate, the Turkish Lira generally softened versus its major peers. The depreciation is the result of mounting political uncertainty as elections to determine whether President Recep Tayyip Erdogan can convince voters to give him the power to disband the government are steeped in geopolitical unrest.
Whilst it seems clear that the controversial Mr. Erdogan will not be granted absolute power, it is very unclear what sort of ruling body will emerge from the vote. Conflict between Turkish security forces and the Kurdistan Workers’ party (PKK) has reignited after more than two years of ceasefire, reviving bitter memories of the PKK insurgency which lasted over 30 years. With no clear indication that any sort of coalition can be formed in such a time of geopolitical turmoil, demand for the Turkish Lira has dampened considerably.
The Pound Sterling to Turkish Lira (GBP/TRY) exchange rate softened by around -0.5% on Wednesday. However, the depreciation is more a result of dampened demand for the British asset, rather than a significant Lira uptrend.
On Wednesday of this week, however, the Turkish Lira edged higher versus many of its currency rivals after difficulties with China’s economy weighs on demand for assets with close ties to the Far East nation. Whilst Turkey is an emerging-market economy, its limited exposure to China has seen heightened demand. Rising oil prices also supported the Lira uptrend.
However, gains are unlikely to be long-lived given the many factors causing traders to avoid long-term investment in Turkey. One of the most significant threats, apart from the forthcoming election, is the emergence of ISIS. The jihadi extremists of the Islamic State of Iraq and the Levant are not just pressed up against Turkey’s southern borders, but starting to attack inside them. Turkey originally gave ISIS fighters a free pass to use the country as a meeting point and for better access to surrounding nations, but after ISIS bombed a Kurdish cultural centre in Suruc near the Syrian border, conflicts became more common place. Erdogan is happy for Kurds and ISIS members to fight further east, however, as it detracts from voters looking for a Kurdish rule in Turkey.
Turkish economic data is unlikely to have a significant impact with trader focus dominated by geopolitical developments. On Tuesday, the Turkish Central Bank opted to hold the benchmark interest rate at 7.5%. This was forecast by the majority of economists given the uncertainty regarding Turkey’s future political outlook. With a complete absence of Turkish economic data for the remainder of the week, the Lira will be subject to geopolitical developments and news regarding the forthcoming election.
The Pound Sterling to Turkish Lira (GBP/TRY) was trending within the range of 4.6198 to 4.6674 during Wednesday’s European session.