Currency traders bracing for Erdogan election chaos

The Turkish lira is already facing the most volatile situation across global currency markets ahead of the country’s landmark elections this weekend, with traders keeping incumbent Recep Tayyip Erdogan in office. If it does, I predict it will likely collapse.

The lira is currently trading at a record low of 19.56 against the US dollar, and market players expect the lira still has room to fall.

Turkey holds presidential and parliamentary elections on Sunday. Mike Harris, founder of advisory firm Cribstone Strategic Macro, told CNBC that if Erdogan wins, “the Turkish lira is likely to crash within months.”

“Ultimately, the Turkish lira will probably be one of the worst performing currencies in the world for some time due to a lack of investment confidence,” he said.

This is largely due to the current president’s unconventional economic policies.

“The Turkish lira has been in a state of volatility and crisis for years under the guidance of President Erdogan’s insane financial ideology,” he said. Steve H. Hanke is Professor of Applied Economics at Johns Hopkins University.

The Central Bank of the Republic of Turkiye did not respond to CNBC’s request for comment.

Turkey’s monetary policy prioritizes the pursuit of growth and export competition over controlling inflation. Erdogan has backed the unconventional view that higher interest rates will increase inflation rather than curb it.

The president’s refusal to raise rates played a role in the historic lira crash, falling from less than 4 lira to the dollar in 2018 to 18 lira to the dollar in 2021.

“In addition to concerns about the uncertainty of the actual election, uncertainty over the possibility of a change of government and how foreign exchange is managed is what drove currency volatility to surge to this 42.7% level,” said Paresh Upadhyaya, portfolio manager at Pioneer. It is.” Investments added that December lira volatility hovered around 10-12%.

Brendan McKenna, emerging markets economist and currency strategist at Wells Fargo, said in an email: “If President Erdogan wins, which is our baseline assumption, the USD/Turkish lira could rise to 23.00. ‘ said.

“Intervention efforts have left the lira vastly overvalued, and depending on the outcome of the election, the currency could move significantly in either direction,” McKenna said.

Erdogan’s biggest rival is opposition coalition candidate Kemal Kilicdaroglu, who has pledged to restore orthodox economic policies and curb Turkey’s hyperinflation.

And if the opposition wins, the lira will start to appreciate some, at least initially, Upadhyaya said.

“This means that the Central Bank of Turkey will regain its independence and be given full power to pursue traditional economic policies,” he said.

Higher interest rates would bring down the country’s inflation rate, leading to a “fairly deep recession” and help strengthen depleted foreign exchange reserves to protect the lira, he continued.

However, according to a Commerzbank report dated May 9, any sharp positive reaction will not last long.

“The coalition is made up of smaller parties that have come together just to oust Erdogan,” said Tata Gorse, senior emerging markets economist at the bank.

“If the coalition faces challenges in cooperation and policy implementation, market enthusiasm may wane, and markets will learn that Erdogan can return to power,” the report elaborated.

Nonetheless, Wells Fargo’s McKenna expects the long-term outlook for the currency to become more optimistic.

“In the regime change scenario, the lira could still experience a downside in the very short term as the currency intervention efforts are halted, but in the long term it could see a very sharp rise. be.”

Turkey is currently struggling with inflation at nearly 50% after hitting a 24-year high of 85.51% last October.

Whether the lira plummets or recovers to some extent, its impact is likely to remain subdued domestically.

“Turkey is now a largely unlinked market with much lower circulation and no real international participation,” Gorse told CNBC in an email. Similarly, Pioneer Investments’ Upadhyaya does not expect any ripple effects.

“We don’t expect any spillover impact to other emerging market currencies or G10 currencies,” he said.