USD/TRY volatility returns ahead of Sunday's elections

Volatility is back for the Turkish lira, with the local elections planned for Sunday raising the likeliness of major disruptions to their financial markets.

Turkey President Recep Tayyip Erdoğan has front-run any such volatility, ensuring market unease after threatening to punish anyone found to be speculating against the Turkish lira. The beneficial interest rates provided in Turkey has helped drive carry trades over recent months. However, with the political uncertainty ahead, Erdoğan has moved to ensure there is less chance of a significant dump in the lira like that seen around the June presidential powers vote. The push to tighten the ability for foreign banks to dump their lira saw overnight swaps rise to more than 1000% in an unprecedented move to protect the currency. This has also hindered the plans of those long TRY traders that wished to exit their carry trades. Meanwhile, JP Morgan warned that they saw it prudent to sell the lira, and despite the actions of the Erdoğan, we have seen the lira lose ground today.

Sunday’s local elections will determine control of money and power throughout the country, with local officials being appointed across 81 provinces. That means mayors (Erdoğan started as mayor of Istanbul), all the way down to village representatives. However, while this is a locally-focused vote, the Turks will deem this a reflection of the balance of support for Erdoğan’s AK Party. Typically, markets have seen the continued dominance of the AK Party as a positive as it ensures a more stable political picture. Despite Erdoğan’s perceived downfalls, his grip on the country means that any challenges are unlikely to be taken well.

With the president controlling the military (who will be out in force on Sunday), the media (who have been ramping up pro-Erdoğan messaging), and the status of his opponents (many are jailed or declared members of terrorist groups), the cynics will presume that it will be a done deal for the AK Party. However, we are seeing significant challenges at two of the most critical areas. Firstly, the CHP candidate is widely speculated to wrestle power away from the AK Party in Ankara. Meanwhile, support for the AK Party in Istanbul is also said to be waning. These two huge strongholds will be crucial signals of power that will likely affect the lira.

From a charting perspective, we have seen significant support for the lira over the first two days of the week, with TRY selling restrictions likely having an effect. However, we are seeing the pair move higher once again, following on from what looks like a retracement. The previous failure to create a new low below ₺5.1343, coupled with an inside trendline, and bullish divergence (higher highs in stochastic) points towards the possibility that we are forming a bottom here for USD/TRY. Certainly, a break below ₺5.1607 would provide us with a more bearish picture. However, as we move towards Sunday’s vote, there is likely to be substantial volatility and the possibility of a long-term trend shift in the event of a move through ₺5.845.

Much of the effect of this event will come from the outcome itself, and with Erdoğan having managed to maintain and even enhance power throughout his political career, another raft of AK Party victories would not be a surprise. However, with market interference, the threat of a switch in control for two of the most important cities in the country, and some bullish technical signs, there is certainly an interesting story building ahead of Sunday’s vote.