Turkish lira analysis

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April, 2021

I am fascinated with the history of money and how monetary policy affects the value of individual currencies. The word politics makes it clear that it seeks to find a balance between different opposing values. For example, printing money that has no economic cover creates new financial value, but it also increases inflation and causes distrust in that currency, which loses value on other currencies and on goods and services (prices simply rise because the quantity of money in circulation increases). Here I want to give a brief overview of the recent monetary policy of the Turkish government which has brought the Turkish lira into a great crisis. In this way, I will also explain my interest in that currency, which is often mentioned in my Forex experiences.

Before exposing the reasons I think the lira will continue to weaken, I want to briefly highlight what makes a currency solid. Money is a means of mediating the exchange of goods, services and other transactions and therefore performs the function of a medium of exchange. In addition, it serves as a unit of account, which is a standard measure, necessary as a precondition for the formulation of commercial agreements that include debt. To satisfy both functions, money must also have the characteristic of a store of value, that is, have a stable value that changes as little as possible over time.

The Turkish lira has been in free fall against the US dollar and other world currencies for years. In September 2017, 3.39 lire for one dollar had to be paid, while in June 2020 a good 8.57 lire had to be taken out of the wallet, 250% more in less than 3 years. Take a look at the chart below and you will see how unstable the Turkish lira is. The main reason for this is the unorthodox economic and monetary policy of Turkish President Erdogan. He does not allow central bank bosses, who recently have changed frequently, to apply a commonly used recipe to curb inflation: raise interest rates. He argues that a high interest rate is the cause of "all evil" and believes, unlike everyone else, that a low interest rate can cure high inflation. When inflation rises beyond measure and the lira weakens considerably, and the head of the central bank has to do something and raises the interest rate, that same boss loses his job.

The fall of Turkish lira from 2017 to 2021

Turkey made headlines again in the last days of March when Central Bank Deputy Governor Murat Cetinkaya was ousted and replaced by Mustafa Duman. This happened just 10 days after the sacking of the same central bank governor, Mr. Agbala, who has raised interest rates since taking office in November 2020 (the graph clearly shows the strengthening of the lira). This led to a large recovery of the lira, until Agbal was also removed. He had promised tighter monetary policy to curb double-digit inflation, but Erdogan opposed it.

The new governor and his deputy should be more flexible towards monetary policy and will likely keep interest rates as low as possible. Turkey's official goal is to keep the inflation rate below 5%, but independent observers can't figure out how they intend to do it: they always follow the same recipe that has repeatedly proven fatal to the patient. Furthermore, in defense of its currency, Turkey has spent a lot of financial reserves trying to support the lira, but without success. He wasted a third of the foreign exchange resources and gold bars he had in state safes.

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Recently, in a public speech, President Erdogan called on the Turkish people to convert foreign currency and the gold in their possession, through Turkish financial institutions into local currency, trying to convince people that this is a winning move, both for the state and for the citizens themselves. It is really difficult to understand this statement, which has served as a great negative publicity. When the government has to say such a thing, it is clear to everyone that it is in enormous difficulty. Subsequently, large purchases of gold and Bitcoin by Turkish investors and citizens were recorded. The problem with all this is that this madness of the Turkish president, it is difficult to find a better word to describe his way of governing, creates enormous problems for the population: my solidarity goes to them. Most of them voted for him in the last election because he is portrayed as a fighter for their traditional values, which still have strong roots in Turkey today. Will this other face showing, a disastrous economic and financial policy, be enough to get us a new president of Turkey in the next elections?

This situation in Turkey, which has lasted for more than a decade and recurs at intervals, is a great source of income for Forex professionals. Why for professionals? For an amateur trader it is not a problem to learn the basics of monetary policy, but it is very demanding to be well, and above all continuously informed about what is happening on the political scene. Often certain news, what we say happens behind the scenes, does not even appear in newspapers or on television, but those who need precisely such information have the sources from which they can obtain it.

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