The Turkish lira plunged roughly 3% yesterday after the US suspended delivery of hardware related to F-35 fighter aircraft ordered by Turkey and cautioned against Ankara’s alternative plan to purchase Russian defense equipment that could trigger another round of sanctions. Following the news, the USD/TRY pair soared from a low of 5.4579 to a high of 5.68 before consolidating at 5.6000 levels.
In the past year, the Turkish lira has lost almost 30% against the dollar, mainly due to worries over central bank freedom and deteriorating ties with Washington.
Commenting on the reason for weakness, Jason Tuvey, senior emerging markets economist at Capital Economics, said: “Factors behind last year’s currency crisis have reared their heads again.”
Washington and other NATO allies are worried that radar integrated with the Russian S-400 missile system, which Turkey plans to buy, will eventually be used to monitor the F-35, making it less capable of evading Russian weapons. Considering these facts, a senior US official warned that the acquisition of S-400 would most probably trigger sanctions.
Patrick Shanahan, acting Defense Secretary, said that he anticipates solving the problem, but his opinion had no positive impact on the lira.
The issue is the latest in a string of bilateral disputes, particularly over Turkish calls for the US to deport Islamic preacher Fethullah Gulen, disparities over the Middle East and Syria war, and economic sanctions against Iran.
The lira was also facing selling pressure from happenings in national politics. Currency instability in the build-up to Sunday’s local elections prompted the central bank to revoke weekly repo auctions; decision analysts believe to be a “back door” tightening, triggering fears that the central bank was under stress from politicians to slash its benchmark rate.
On Monday, the lira declined by nearly 2.5% against the greenback after results indicated that President Tayyip Erdogan’s AK Party is on course to give up control of both Ankara and Istanbul. Yesterday, the AK party spokesperson said that it had raised objections to the outcome of the election in all districts in the regions mentioned above.
On the Turkish economy, Nikolay Markov, a senior economist at Pictet Asset Management, said: “The lira is under pressure as now the focus is back on structural problems for the Turkish economy.”
A widening current account deficit could heighten the financial crisis by further depreciating the lira, resulting in higher inflation and cost of borrowing, Markov said.
Markov believes that “The central bank should raise policy rates, but that won’t happen because of pressure from the government,” even though AKP electoral losses could minimize that stress. The Turkish lira is expected to remain weak until the F-35 issue gets sorted out between Turkey and the US.
Technically, the USD/TRY pair has found support at 5.50 levels and is moving within an ascending channel. The momentum indicator is making new highs. As a result, we can expect the lira to weaken further against the US dollar.
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