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Shorting the Turkish lira against the US dollar has been one of the great short trades for forex traders  in Q2.

Many currency hedge funds have been enjoying this gift that seem to simply keep on giving. However, there has been a reverse in the value of the Turkish lira since the election victory of Turkey’s president, Recep Tayyip Erdogan, on Monday. The question is, if you have been stopped out by the 3% rally against the USD, should you get back in, or is that it for the TRY trade?

Can the Turkish lira sustain its gains?

It looks likely that the sentiment that has pushed the Turkish lira upwards is going to be a short-lived one. Investors may be reacting to hopes that Erdogan’s victory will bring an element of stability to the country. However, there are also worries that Turkey is just part of a spreading fear of losses within emerging market debt.

One area that forex traders have focused on has been comments by the president that he will cut interest rates in Turkey and potentially intervene directly in Turkish monetary policy. Traders never like to see a politician rolling up their sleeves and tackling macroeconomics – they prefer it if governments leave this to economists. Any signs that Erdogan is applying pressure on monetary policy will be greeted with further sell-offs.

Bear in mind that the Turkish lira has lost 13% of its value against the USD since January, and that it is down 75% against the USD over the last 10 years. It has been an epic trade for those adventurous enough to consider it. There have been some serious changes in direction, like the one on Monday, but overall the long term trend for traders has been a beneficent one. Turkey just can’t seem to get its house in order, and it looks unlikely that Erdogan will be able to manage this.

Erdogan’s turbulent partners could cost the currency

One issue that has not received much coverage in the financial media: Erdogan’s AKP party suffered a decline in support in last weekend’s elections – this means it will need to rely on the ultra nationalist MHP party to support its legislative agenda and to help the AKP to win some tough municipal elections in 2019.

“The MHP could prove to be a thorny partner: its demands for harsher policy towards the Kurds will inflame tensions at home and risk fresh tensions with NATO allies who support Kurdish enclaves across the border,” says Kevin Allison, an analyst with Eurasia Group. “The MHP also wants to loosen the budgetary purse strings, precisely when foreign creditors are already punishing Turkey for pumping too much money into the economy.”

No, you are right, it does not look good for the Turkish lira. The rally earlier this week seems to be have been fuelled more by optimism than rugged fundamentals. Turkey still has too many problems to fix for any serious forex trader to line up on the side of the lira against the dollar. Expect to see the lira fall for some time to come.

The Turkish lira is available to trade as a CFD (or spread bet in the UK) on most of the major respected forex platforms. Check out our list of brokers for more details on these.

Please note this article does not constitute investment advice. Investors are encouraged to do their own research beforehand or consult a professional advisor.

Stuart Fieldhouse

Stuart Fieldhouse

Stuart Fieldhouse has spent 25 years in journalism and marketing, including as a wealth management editor for the Financial Times group, covering capital markets and international private banking, and as an investment banking correspondent for Euromoney in Hong Kong. He was the founder editor of The Hedge Fund Journal.

Stuart has worked at CMC Markets, supporting the re-launch of its global financial spread betting and CFD trading platforms. He is also the author of two books on trading, published by Financial Times Pearson. Based in The Armchair Trader’s London office, Stuart continues to advise fund managers, private banks, family offices and other financial institutions.

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