Turkish lira lost more than 25% against dollar in a single week - What happened?

After Recep Tayyip Erdoğan won the June 24 presidential elections by receiving 52.59% of the votes, it seemed like the TRY finally stabilized against the dollar and the euro as markets hoped for the new government to prepare a new economic and monetary policy with long-term goals that could help the Turkish economy get out of the slump. For the next month or so, the USD/TRY pair moved up and down in a relatively tight range below the critical 5 mark.

However, markets started to grow impatient as they didn't see any solid proof that the CBRT was going to be able to take the necessary policy steps without an intervention from the government. Moreover, President Erdoğan's decision to appoint his son-in-law, Berat Albayrak, as the new Minister of Finance and Treasury, drew a lot of criticism from foreign investors.

Sure enough, the TRY started to weaken against more stable currencies, and the USD/TRY pair broke above the critical 5 mark for the first time in August. After that, all hell broke loose.

Instead of allowing the central bank to step in and do what it can to help the lira, Erdoğan continuously stated that he was against rate hikes and "reassured" that the FX rates weren't an issue. While markets were eagerly waiting to see what Turkey was planning to stop the falling lira, a political crisis with the United States pushed investors even further away from the currency. US President Donald Trump said that he would start imposing tariffs on Turkish goods if they didn't drop the charges against pastor Andrew Brunson, who is accused of obtaining state secrets with the intention of assisting the military in its coup attempt against the Turkish government.

Although news of Turkish officials going to Washington to resolve the crisis helped the lira for a short period, the fact that no real progress was made during the talks brought another TRY selling wave, this time sending the USD/TRY pair above the 6 mark on Friday. In an attempt to calm the markets, President Erdoğan told Turkish citizens to sell their dollars and euros to fight against the West and said that people shouldn't worry about exchange rates and ignore them. 

As if Erdoğan's comments weren't putting the lira under enough selling pressure, President Trump announced new tariffs on Turkish steel and aluminum imports to send the USD/TRY to a record high at 6.85. "I have just authorized a doubling of Tariffs on Steel and Aluminum with respect to Turkey as their currency, the Turkish Lira, slides rapidly downward against our very strong Dollar! Aluminum will now be 20% and Steel 50%. Our relations with Turkey are not good at this time!" Trump said via Twitter.

As of writing, the USD/TRY pair was up nearly 17% on the day at 6.48, almost 27% above 5.09, where it started the week. 

Here is what some major banks had to say about the lira:

Danske Bank: “The Turkish lira saw its own Black Friday as markets became more disappointed on President Erdoğan’s  speech at a rally. The speech was long-expected, and the disappointment amplified the move in the USD/TRY pair. We see the possibility that Turkey could get FX funding from Russia. However, upcoming US sanctions against Russia bring more uncertainty.” 

Nordea Markets: “Longer out on the horizon, we believe there are four things that needs to be fulfilled for the TRY to stabilize. First of all, we need to see definite evidence that the central bank can act independently and economic policy in the country overall is rational. Second, Turkey needs to change its aggressive stance towards the outside world (US, EU, Israel, Syria, Greece, etc). Third, the government needs to show the markets that it can execute the recently presented fiscal consolidation plan of 2019  by in particular running a primary balance surplus and decreasing the current account deficit (note that we find the recent rumours of involvement with IMF very unlikely due to both domestic politics as well as geopolitical tentions with the US). Finally, we probably need to see somewhat easier global liquidity conditions, although this might prove difficult as the Fed keeps hiking and normalising its balance sheet. At the very least, a stabilization of the TRY is dependent on the USD not rapidly increasing.”

Rabobank: “Unless the central bank steps in (or: Erdogan caves in) and raises interest rates and unless Turkish officials make a serious effort in reconciling the diplomatic differences with the US and also the EU, this increasingly destabilising sell-off isn’t going to stop anytime soon.”