Turkish political upheaval could see USD/TRY blow past 2018 levels

Political upheavals in Turkey could see the USD/TRY blow past 2018 levels following municipal elections that have seen AKP - party of the country's President Recep Tayyip Erdogan - lose control of the capital Ankara. 

The loss, in Sunday’s (31 March) election, is AKP's first in the capital following 16 years in power. Opposition parties are also ahead in the contest for mayor of Turkey’s largest city, Istanbul, according to newswire AP.

Commenting on the volatility of the Turkish lira since last Friday (22 March), Per Hammarlund, chief emerging markets strategist at Nordic bank SEB, said he expects the Turkish government to let the currency slide after the local elections, the central bank to hike interest rates sharply and USD/TRY to reach beyond the 2018 high of 6.88. 

Hammarlund noted: “The Turkish government and the regulator’s heavy-handed approach, restricting offshore access to TRY and sending swap rates soaring, has brought down USD/TRY to levels seen before Friday. However, I suspect that the measures will scare foreign investors who see an increased risk of having their cash trapped. In other words, the flow of forex that Turkey still needs will be sharply reduced (i.e. the cost for Turkish borrowers will increase).”

After the political dust of Sunday’s elections settle, the Turkey will have to let the TRY slide.

“I fail to see how the government will restore investor confidence any time soon. Turkey’s finance minister Berat Albayrak will announce a reform package after the elections, but the central bank will have to hike interest rates sharply, maybe by 400bps," Hammarlund added.

“The likelihood that Turkey will have to go to the IMF has increased substantially and has now become our main scenario. USD/TRY blowing past last year’s high of 6.8838 (close on 13 August 2018) looks likely.”