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April 04, 2019

TRYing to Fool Investors in Turkey

Currency dynamics are often intriguing, even in the day-to-day. But what has been unfolding this week in Turkey truly rises to the level of financial drama.

Over the weekend there was an election in that country. And while President Recep Tayyip Erdogan's ruling Justice and Development Party, known as AK Parti, won a majority of votes, it lost elections in the major cities, which amounted to a fairly resounding defeat.

Leading up to the election, foreign exchange markets were watching a bizarre drama play out with the Turkish lira. The currency code for the Turkish lira – TRY – took on new meaning. Last week, a lot of investors were trying to sell out of their Turkish lira positions. In addition to the upcoming election, the country's international reserves had fallen as the government tried to prop up its currency ahead of the vote.

So while Turkey's central bank was buying lira to try to increase its value, securing liquidity for investors trying to sell their currency positions was getting harder, to the point where interest rates for overnight loans via the offshore swap market rose to levels above 1,000 percent on an annualized basis.

US Dollar vs. Turkish Lira

Initially that worked: The lira went from about 5.76 lira per U.S. dollar to just under 5.33 – a roughly 7.5 percent increase in value - over the course of a couple of days at the beginning of last week. But by the time we got to last weekend, the currency had given up over 5 percent of that move, ending the week near 5.65 percent. At the beginning of this week, just after the elections, the lira gained a little over 3 percent but has since given up that gain as President Erdogan refused to concede defeat in the election.

Longer term, anyone who has been in the financial markets long enough knows that this is the worst message you can send to the investment community when a country is trying to tout its economy as a place to park their money. While it briefly seemed to succeed in terms of the currency valuation, it failed to help the AK Parti. Now there is a whole new reason not to want to put your money in Turkey.

My View: Elections have consequences. So does importance in the global economy. China, for example, has tried to manage its currency to its advantage, but it is such an economic behemoth that investors cannot really ignore it. Turkey does not have that luxury. Let's hope that President Erdogan's successors learn this lesson.

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