How may elections affect the lira?

On Friday, USD/TRY rose to its last October’s highs above the 5.82 level. Such a dramatic drop of the Turkish lira raised concerns about the instability of the Turkish economy once again. With many political and economic uncertainties in the country, we may just wonder whether the local elections on March 31 will help the government to keep the lira under control. In this article, we would like to look at the current performance of the Turkish currency and see what trading opportunities it may suggest.

At first, let’s consider the factors, which make the TRY weaker.

The relationships with the US

When we are analyzing the bearish factors for the Turkish lira, the first thing, which comes to our minds is connected with political actions. After Turkey (the member of NATO) agreed to buy Russian S-400 defense system back in February, the US said that the Russian system could not be integrated into the territory controlled by NATO and warned about the upcoming sanctions. In addition, the Golan Heights issue increased tensions between Turkey and the United States. Golan Heights is the territory which was seized from Syria by Israeli during the Middle East war in 1967. On Friday, the US president Donald Trump recognized this territory as Israeli. This move was negatively met by Turkey and increased fears in the market.

Economic problems

The negative factors for the TRY are not only limited by politics, though. The latest release of the GDP growth showed the country entered into the recession phase. The indicator declined by 2.4% in the fourth quarter of 2018. This is the lowest level since 2016. In addition, the unemployment level reached 13.5% at the end of 2018. These factors weakened the TRY.

It’s worth mentioning the recent fall by $6.3 billion in the central bank’s net international reserves at the beginning of March. The markets were shocked by this plunge. JP Morgan, the famous analytical bank, even suggested going long on the dollar against the TRY. However, the central bank official said that the drop wasn’t unusual and mentioned foreign-debt repayments and sales to state energy companies.

What supports lira ahead of the local elections?

After the unexpected fall on Friday, the Turkish president Recep Tayyip Erdogan made a speech where he blamed such banks as Citigroup, JP Morgan and Deutsche bank in manipulative actions over the price of lira. He said, that those who speculate against the lira would pay “a heavy price”.

The central bank of Turkey also made some significant measures to support its currency. At first, it introduced an indirect rate hike from 24% to 25.5%. In addition, the central bank stopped its regular $500 million overnight lending. This situation put local banks under pressure not to provide liquidity to the foreign fund managers who want to go short on the Turkish lira. The measures helped the lira to take back its positions.

The government plans to continue controlling the liquidity of the lira at least until Sunday’s elections. As for the economic outlook after the elections, the Turkish finance and treasury minister Berat Albayrak sees it as “extremely positive” as some additional measures would be made by the central bank in the upcoming months. Would it actually happen? Many analysts doubt about it. The current desperate attempts to support the lira only shows the ongoing problems, according to the analytical institutions.

How the local elections may affect the TRY?

Investors and traders will keep an eye on the election results as the current Erdogan’s AK party may lose control over Ankara and other big cities. If there is a drop in the current support of the AKP party, it may motivate the government to make changes in economic policies and implement reforms which will support the Turkish lira. If the Turkish president fails to bring confidence into the market, we may see the fall of the lira.

Now let’s look at the key levels of USD/TRY.

On the daily chart, we can see that the pair has been falling since Monday on the government’s supportive measures. On Wednesday, it has tested the crossover of 50-day SMA and 100-day SMA. If lira continues to strengthen, the next support will lie at 5.2191. In case of more uncertainties, the pair will rise to the resistance at 5.4813. The next resistance is placed at 5.6545. If we look at indicators, PArabolic SAR still shows the upward movement for the pair, while ADX demonstrates the equal pressure of bulls and bears.

To conclude with, we need to focus on the comments by the Turkish president and the path of the election process. Any uncertainty in the government's further moves will weaken the TRY.

Ekaterina Gorbatenko