USD/TRY could be primed for a bearish reversal in emerging market recovery

Turkish Lira finds buyers as Erdogan sacks central bank head

The weekend announcement from Turkish President Recep Tayyip Erdogan saw both the central bank and treasury heads laid off in response to a huge lira devaluation in recent years. Known for his somewhat unorthodox approach to monetary policy, Erdogan will hope that any new appointments will help to shift the emphasis towards an environment where the Lira could appreciate to lower the value of dollar denominated debt held by the country.

Initial signs of a reversal came through yesterday, with the USD/TRY pair tumbling to lay the ground for the biggest decline since 2018. However, we are seeing crack appear in that argument, with the pair already starting to recover after finding support on the confluence of Fibonacci and trendline support. This does highlight the fact that we remain some way off seeing tangible action that will shift the dial in favour of the lira. With this USD/TRY bull trend having persisted for over a decade, it will take something substantial to bring a more confident bullish outlook for the lira.

Nevertheless, what could benefit the lira is perhaps not the changes made by Erdogan, but instead the recent US election and Pfizer vaccine breakthrough. These two changes taken in conjunction with eachother could bring about a shift towards emerging market currencies as traders see a move out of the haven dollar towards riskier assets.

With many emerging economies holding substantial dollar-denominated debt, such a dollar devaluation could similarly help those economies by lowering the value of their debts. While the USD/TRY chart clearly remains within a bull-trend, it could be worthwhile watching for a potential breakdown below the ₺7.7794 level to bring about a fresh bearish reversal signal for this long-standing uptrend.