GBP/TRY Exchange Rate Soars as No End in Sight for Turkey’s Currency Crisis
The Pound Sterling to Turkish Lira (GBP/TRY) exchange rate has roared higher over the last month as the sell-off of the Lira reached fever pitch, but can we expect more of the same over the next few months?
At the time of writing on Thursday the GBP/TRY exchange rate is up around 0.2% this morning, sitting just shy of the highs struck at the end of last week, with one Pound currently fetching 8.5 Turkish Lira at the interbank exchange rate.
Turkish Lira (TRY) Exchange Rates could Tumble Further if the TCMB Holds Back
The Turkish Lira (TRY) has been hitting headlines over the last few weeks, following a dramatic slide in value that seen the emerging market currency shed around 40% of its value this year, prompting a domestic financial crisis that threatens to spill over into other countries.
The dramatic drop in Turkey’s currency has been attributed to soaring domestic inflation and US interest rate hikes, as well as fears over the independence of Turkey’s central bank and a rift between the Ankara and Washington.
The Turkish lira has lost value against the U.S. dollar this year. Investors have grown increasingly concerned about Erdogan’s deepening diplomatic rift with the United States. https://t.co/1S9zlBS1eF Via @ReutersGraphics pic.twitter.com/OKudLdznUH
— Reuters Top News (@Reuters) August 30, 2018
The Turkish Lira’s woes have been further exacerbated by the US Dollar’s (USD) bullish run over the summer, which is making it even more difficult for Turkey’s banks to refinance $77 billion of foreign currency-denominated debt.
So is there any chances of the Lira reversing course anytime soon?
Data released earlier this week revealed that Turkey’s Consumer Price Index (CPI) struck 17.9% in August, the fastest pace of inflation in 15 years.
Shortly afterwards the Central Bank of Turkey (TCMB) released a statement saying that it was ‘deeply concerned’ by August’s CPI reading, pledging to ‘take necessary action’ and that its ‘monetary stance will be adjusted’.
The comments were interpreted as a signal that the Bank would raise interest rates when it meets next week, providing a much-needed boost to the Lira.
However, despite this, TRY exchange rates still remain in the doldrums, with the currency still around 1% down from its closing levels last week.
This is largely due to President Recep Tayyip Erdogan’s unconventional stance on monetary policy, with analysts fearing that his dislike for higher interest rates will lead to the bank holding back next week.
Piotr Matys, EM Strategist at RaboBank explains:
‘To our mind the central bank should surprise the market by raising rates by at least 10%. However, as always, there is a massive difference between what the central bank should do and what it will be capable of doing amid perceived dislike for higher rates amongst prominent Turkish officials.’
Should Turkey’s central banker’s be reluctant to raise interest rates more than a couple of percent (they are currently already at 17.75%), then it’s likely to be seen as the final nail in the coffin of the Bank’s independence, something which would undoubtedly see pressures against the Lira mount even further.
Furthermore, the contagion fears which emerged following the slump in TRY has resulted in a wider rout in emerging markets – something which could make it difficult for the Lira to mount a recovery even in the event of a substantial rate hike from the TCMB.
Pound (GBP) Exchange Rate Strength Set to Be Driven by Brexit Sentiment
Meanwhile, the extent of the Pound’s (GBP) near-term gains against the Turkish Lira (TRY) are likely to be determined by progress being made in Brexit negotiations.
Sterling sentiment is currently in the gutter as the UK looks increasingly likely to be headed towards a no-deal Brexit.
Barring any major positive developments ahead of an EU summit in October, this could severely limit any gains in the GBP/TRY exchange rate and leave the Pound to flounder against its other peers.