ISTANBUL,TURKEY/AUGUST 07,2016: President of Turkey Recep Tayyip Erdogan during an interview with Russian television
The USD/TRY price continued rising as investors focused on the emerging tensions between Turkey and western countries. The pair rose to a high of 17.94, which was the highest it has been since December last year. It has jumped by over 77% from its lowest level this year.
The USD to TRY exchange rate continued rising as investors reflected on last week’s meeting between Erdogan and Putin. The two leaders agreed to deepen the collaboration between Turkey and Russia. As a result, many western capitals sounded alarm on whether Turkey will help Russia avoid sanctions imposed for its invasion of Ukraine.
According to Bloomberg, the US and other western capitals have warned that they will sanction Turkey if it does that. This will be in addition to existing sanctions they have placed on Turkey for buying Russian-made weapons. Turkey is a member of NATO, an organization made to counter attacks from foes like China and Russia.
Another risk for Putin’s meeting with Erdogan is that it could push Turkey to oppose NATO membership for Sweden and Finland. All NATO members are required to vote for new members.
The USD/TRY price is also rising as investors wait for the upcoming US inflation numbers that are scheduled for Wednesday this week. Analysts expect that inflation slipped slightly because of the falling gas prices. Still, they expect that the Federal Reserve will continue hiking interest rates in the coming months. This is after data published on Friday showed that the economy added over 528k jobs.
The USD/TRY has been a good investment over the past decades. This means that shorting the Turkish lira has generated unimaginable returns for most people. For one, the pair has jumped by more than 1,150% since 2007. In other words, holders of the Turkish currency have seen the value of their holdings crash by this amount.
The crash of the Turkish lira is attributed by three main factors. First, a few years ago, President Erdogan changed the government policy and made himself the final say when it comes to appointments of CBRT governor and officials. In most countries, the president nominates central bank officials who are then confirmed by parliament.
Second, Erdogan has used his new powers to hire and fire CBRT officials who disagree with him on interest rates. Erdogan believes that interest rates should remain as low as possible.
Finally, the CBRT has embarked on an easing policy even as inflation rises. In 2021, the bank slashed interest rates several times and brought the main rate to 14%. Since then, inflation has surged to over 70%. All these factors have led to a surge of the USD/TRY pair.
A common question is whether you should buy or sell the USD/TRY pair. As mentioned above, the Turkish lira has underperformed most currencies and become almost worthless. Unfortunately, this situation will likely continue in the coming months unless the CBRT decides to act.
And with Turkey going to a national election in 2023, it is highly unlikely that the bank will start hiking interest rates this year. On the other hand, the US dollar is expected to keep rising against other emerging market currencies because of the hawkish Federal Reserve.
The Fed has delivered several rate hikes this year. In July, it hiked rates by 75 basis points, bringing the total year-to-date increase to 225 basis points. Analysts expect that the bank will continue hiking interest rates in the coming months as it battles the soaring inflation.
Data published recently showed that the economy has recovered all jobs that it lost during the pandemic while inflation remains at a multi-decade high.
The four-hour chart shows that the USD to TRY exchange rate has been in a strong bullish trend in the past few weeks. Along the way, it has managed to move above the 25-day and 50-day moving averages while the Relative Strength Index (RSI) moved above the overbought level.
Therefore, the pair will likely continue rising as bulls target the all-time high of 18.38. A move above that point will open the possibility of the pair rising to the resistance at 20. This view will be invalidated if it moves below the support at 17.50.
2023 will be an important year for the USD/TRY price because of the Turkish election that will happen in June. Erdogan will likely face a coalition of opposition parties who are opposed on his economic pain for most people in Turkey.
Therefore, there is a likelihood that he will oppose any new measures to hike interest rates. On the daily chart, we see that the pair has been in a strong bullish trend in the past few months. It remains above the 25-day and 50-day moving averages. Therefore, there is a possibility that the USD/TRY will continue rising in 2023 and hit the key resistance at 25.
It is relatively difficult to estimate where the USD to TRY exchange rate will be by 2025. For one, it is unclear whether Erdogan will win next year’s election. Still, the pair continues to be in an extremely bullish trend. A look at the weekly chart shows just how it has rallied. Therefore there is a likelihood that it will continue rising and hit 30 by 2025.
Again, when we look at the monthly chart, we see that the pair has been in a strong bullish trend. Since 2007, it has risen in more than 80% of all the months. The bullish trend is being supported by all moving averages. Therefore, the bullish trend will likely continue in the coming years.
This is simply because people will keep preferring holding the US dollar against the Turkish lira. If this happens, we can’t rule a situation where the pair rises to above 35 by 2030. The only factor that will stabilize the Turkish lira and the USD/TRY will be when the central bank decides to embrace a conventional monetary policy.
This post was last modified on Aug 23, 2023, 08:40 BST 08:40