The Turkish lira is getting worthless by the day. The USDTRY pair jumped by as much as 15% on Tuesday. The same price action happened in other pairs like EURTRY and GBPTRY. This means that these three pairs have jumped by more than 40% this year.
Turkish lira slump
The Turkish lira has become one of the most worthless currencies in the emerging market. The pair slumped to a record low of 13.50 on Tuesday. This means that the currency’s value has dropped by more than 280% in the past five years. It has shed more than 800% since 2008.
The sharp decline in the pair is mostly because of the Turkish president and the Central Bank of the Republic of Turkey (CBRT).
Unlike in most countries, the Turkish president can hire and fire central bank officials at will. As such, the president can have a direct impact on monetary policy.
In the past few years, President Erdogan has used these powers to the maximum. For example, in the past 12 months, he has fired two central bank governors. He appointed the current governor in March after the previous one made three rate hikes in a bid to stabilize the currency.
And two months ago, the president fired three CBRT governors who were opposed to interest rate hikes. He replaced them with less experienced officials who will be keen to maintain a dovish stance.
Therefore, the USDTRY has jumped sharply as investors react to the actions of the CBRT and the president. They have also lost confidence in the two institutions.
The decline on Tuesday happened as investors reacted to a fiery speech by the president. In it, he committed to continue fighting the “economic war” that the country is facing. He blamed economists and foreigners for the lira crash.
The USDTRY pair has jumped recently because of the actions of the CBRT. In an ideal situation, a central bank tends to tighten in a period of high inflation. Hiking interest rates and reducing the money supply helps to limit inflation.
The CBRT has done the opposite. Instead of tightening, the bank has made three big rate cuts this year. It has moved rates from almost 20% to the current 16%. In the same period, most emerging market central banks have made several rate hikes. For example, the South African central bank hiked rates for the first time. The Brazilian and Russian central banks have also hiked rates.
There are dangers to the actions by the CBRT. For one, Turkey is a net importer of items. For example, it buys its oil from abroad using dollars. Therefore, the crashing lira means that consumers will need to pay more money at the gas pump.
The biggest worry is hyperinflation. The country already has one of the highest inflation rates in the emerging markets and the trend will go on. Therefore, there is also a likelihood of political instability as the economic conditions worsen.
The USDTRY pair has gone vertical. The pair has jumped to a record high of more than 13. As a result, the pair has moved above the Ichimoku cloud. It has also risen above all moving averages. Oscillators, on the other hand, have all risen to overbought levels. Therefore, the pair’s path of the least resistance will be to the upside.
However, in the coming days, there is a likelihood that the pair will be relatively volatile. For one, the CBRT may decide to act in a bid to stabilize the currency.