Turkish Lira crisis deepens as USD/TRY and EUR/TRY reach new highs
Turkish Lira Outlook:
- Turkish inflation increased by +73.5% year-on-year in May, boosted by soaring food and energy prices following the Russian invasion of Ukraine.
- Turkey has no more foreign assets to support the lira: USD/TRY is up more than 26% since the start of the year, while EUR/TRY is up almost + 19% since the beginning of the year.
- The Turkish Lira crisis will continue to worsen until a sound monetary policy is deployed.
The pound crisis continues
We have intermittently looked at the Turkish Lira since the end of Septemberas the emerging market currency remains involved in a classic monetary crisis. Unwise intervention efforts failed to stop the bleedingand the Turkish lira is in full free fall in 2022.
Rising food and energy prices as a result of Russia’s invasion of Ukraine are hitting Turkey harder than most countries: it is the world’s third-largest wheat exporter; and it imports 93% of the oil it consumes and 99% of the gas it consumes. In TRY terms, food prices are up over +93% YoY, while energy prices are up +92% YTD (Brent Oil). Overall, this led to a +73.5% YoY increase in Turkish inflation through May.
As the Turkish government continues its policy of reimbursing domestic savers in the event of a decline in the lira in an effort to avoid demand for foreign currencies such as the euro and the US dollar, the net reserves of the Central Bank of the Republic of Turkey (CBRT) plunged to -$55. billions of dollars when accounting for foreign exchange swap agreements with Turkish national banks, according to Reuters.
As stated in December 2021, “in order to make up for the losses, the CBRT will have to print more currency – which may exacerbate the ongoing inflation problem, a problem that cannot be solved with Turkey.” President Recep Tayyip Erdoganthe misguided obsession with low interest rates. As things stand, the Turkish Lira’s beatings will continue until morale improves – or rather, until the CBRT adopts a sound monetary policy.
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EUR/TRY [BLUE] & USD/TRY [ORANGE] TECHNICAL ANALYSIS: DAILY PRICE TABLE (June 2021 to June 2022) (TABLE 1)
The longer-term outlook remains: the factors are in place for the monetary crisis to worsen, according to Emerging Markets Crisis Monitor: record inflation (and record real yields), negative current account, rising implied currency volatility, widening bond risk premia and rising external debt burden are hallmarks of an emerging market currency in crisis.
— Written by Christopher Vecchio, CFA, Senior Strategist