Turkish Lira – How much Worse can it get
Are you looking for a new asset to trade? Or are you looking for more excitement and volatility? Most traders are trading the standard minor and major currency pairs, and not a lot of them are aware of some of the benefits in trading “exotic” currency pairs such as the Turkish Lira.
The Turkish Lira, sometimes known as the second Lira is linked to the Republic of Turkey and is oftentimes the most traded currency amongst the exotics. The currency is known as the second lira as it is literally the second Turkish Lira. The first Turkish lira was used during the period between 1923 and 2005, the end of which marks the start of the second Turkish Lira period.
Mid 2018 the Turkish lira devalued by more than 20%, entering into record low territory against the U.S. dollar, due to a combination of economic and geopolitical problems, that were troubling Turkey. Besides suffering from rapidly rising inflation and political pressure to keep interest rates low, the country faced a looming debt crisis that threatened to place further pressure on the economy and currency.
The Turkish government increased interest rates to new and ridiculous highs and the Lira started to recover but this did not last for long. A New crisis has hit not only Turkey but the world globally. However, the issue is that Turkey was already in a crisis before COVID-19, losing a war on 2 fronts, both in Syria and in Libya. The economy was already crumbling and on top of that, Turkey now ranks as the 9th country with the highest number of COVID-19 patients.
So what is happening with the Lira?
With the current situation escalating in Turkey, in terms of government debt and lockdown measures, the Turkish lira has continued to decline throughout April and the beginning of May, reaching all-time lows against both the USD and the EUR.
Since the 8th of May , the TRY has started to recover and we can already see signs of this. However, even with the recovered pips over the last 2 weeks, we are still at the level of the previous high, signalling just how bad the situation is with the TRY.
It is expected that the Turkish currency is likely to see an increase in buyers as the asset reaches new highs and becomes more attractive to traders who are looking to purchase possible undervalued currencies. However, this does not mean the asset is likely to continue its course towards a more reasonable value. The asset may find support at specific prices, resulting in a new decline for the TRY.
Commerzbank for example has advised of a possible support price, “USD/TRY’s advance has taken it to its current May high at 7.2692, a new all-time high, before swiftly coming off again towards the 6.8000 region. Below it, minor support can be spotted at the 6.7943 April 8 high and along the 55-day moving average at 6.7142. Minor resistance sits at the 7.0006 April high and more significant resistance at the 7.2692 recent all-time high.”
Currency Swaps to support the TRY
The Turkish government has been seeking help from other countries to bolster its reserves of foreign currency, which have been depleted by the defence of the lira, and to help the economy withstand the impact of the COVID-19 outbreak. It is rumoured that the UK, Japan and Qatar have all agreed on a deal with Turkey to swap currencies in order to stop Turkey’s central banking system from depreciating.
This again shows the dire situation in Turkey, especially surrounding its currency. If the above deals with other foreign nations are agreed, this could partially assist Turkey. However, the measures might not save it completely as there are other issues such as Public Debt, interest rates, increased expenditure due to war in northern Syria and in Libya. To all these also contribute requests from occupied areas for debt forgiveness, such as the occupied North of Cyprus.
Even with 3 possible agreements regarding currency swaps, the Turkish Government is still looking to offload more Liras. Turkey has also put in a request for the European Union for a currency swap on the 14th May but it was rejected. Since then, the government is rumoured to be looking at other possible swaps. This may assist over the medium term but long term issues still stand.
The Turkish Lira and Exotic Currencies, in general, can offer an alternative for traders looking to get away from traditional currencies or possibly looking for larger market movements. Out of the large selection of exotic currencies, the Turkish Lira is likely to be the most appealing to traders due to the current crisis hitting the Turkish Currency deeply. The Turkish Lira is seeing the highest volatility and strongest trends which can, in certain ways, make analysing the asset easier.