Analysis of Turkish elections and their implications for the Lira as a USD/TRY pair
TURKEY ELECTION UPDATE
In 2023, Turkey encountered several challenges, including an earthquake in February. Despite positive early growth signals, the outlook for the remainder of the year and beyond is uncertain. The Lira (TRY) has remained weak due to President Erdogan’s ongoing monetary policy stance, which has drawn criticism from local and international economists. President Erdogan’s policies have deviated from the conventional belief that higher interest rates combat inflation. A chart depicting interest rates and CPI levels since President Erdogan implemented his monetary policy indicates this deviation. As a result of rising costs of living and loss of savings, citizens have become increasingly frustrated leading up to the election, increasing pressure on President Erdogan.
The Turkish Election appears to be headed towards a second round as none of the candidates were able to secure 50% of the votes in the initial round. The incumbent President, Recep Tayyip Erdogan, aims to renew his presidential tenure and prolong his almost twenty-year reign in the Turkish political sphere.
As per the latest report by the state-owned media Agency, Anadolu Agency, neither of the candidates has secured a 50% majority in the official election authority, YSK. Consequently, a runoff election is deemed necessary. The current President Erdogan faces a stiff competition from Kemal Kilicdaroglu, who secured approximately 43.12% of the votes and is supported by numerous opposition parties. Mr Kilicdaroglu is a retired civil servant and has been Turkey’s primary opposition for over ten years. He leads the Republican People’s party (CHP) and has successfully led them to significant victories in major cities like Ankara, Istanbul, and Izmir.
ECONOMIC OUTLOOK AND IMPLICATIONS OF THE ELECTIONS
Despite some recent signs of a slowdown, the issue of Turkish inflation has been a significant concern over the past two years. The April YoY figure was 43.4%, down from 50.5% in the previous month, but price pressures remain uncomfortably high. Concerns persist that inflation may increase in the latter half of 2023. These factors have heightened pressure on President Erdogan, as continued reduction in inflation is likely to necessitate a shift towards a considerably stricter monetary policy stance.
Market participants have a primary concern regarding the potential impact of a change in leadership on monetary policy. Mr. Kilicdaroglu, who is running against Erdogan, has pledged to limit parliamentary powers if he were to win the election.
As anticipated, the Turkish Central Bank maintained its interest rates in April. The reason provided by the Central Bank was that the prevailing monetary policy is adequate to facilitate the required revival after the earthquake. Moreover, the Central Bank reaffirmed the importance of maintaining low rates and supportive financial conditions while highlighting its alternative policy instruments and their synchronization with “Liraisation” objectives.
The Central Bank is currently confronted with the arduous responsibility of maintaining stability in the Lira amidst the gradual release of election statistics. The currency markets remain highly volatile, with bond yields experiencing persistent upward pressure, as market participants eagerly anticipate alterations to monetary policy subsequent to the elections.
TECHNICAL OUTLOOK AND FINAL THOUGHTS
The anticipated outcome for the elections is a sustained period of high volatility. Analysis of the price action of USDTRY reveals that the abrupt and volatile movements are difficult to interpret. As there is no clear winner from the elections, any fluctuations in USDTRY leading up to the runoff in two weeks could be attributed to US dollar activity.
The focus of attention and observation should be directed towards the developments surrounding the US in the event of such a circumstance, specifically regarding the raising or suspension of the debt ceiling. As the deadline of June 1 approaches, an increase in volatility and uncertainty can be anticipated, potentially leading to a rise in short-term US yields. The resolution of the debt ceiling debate is expected to have a downward effect on USDTRY; meanwhile, any persistent disagreements and failure to reach a solution would likely maintain support for the US dollar in the short-term.
If the US dollar continues to increase or if the Lira weakens further, an all-time high above the 20.00 mark could be achieved. This is not unlikely given the current price at approximately 19.70 and a daily high of around 19.94. In case USDTRY experiences selling pressure, prices may find support around 19.28, which also coincides with the 50-day MA as a line of downside support.
USD/TRY Daily Chart – May 16, 2023
