Realist, not conformist analysis of the latest financial, business and political news

What Erdogan Misses – The Turkish Lira Should Be Falling In Value

We’ve another of those complaints by a politician that reality is just such a bitch. Here it’s Erdogan in Turkey complaining that the Lira is falling in value. But then the lira should be falling in value given the economic policies being pursued by Erdogan. Hmm, OK, so we can see why Erdogan doesn’t like the markets here but also we should see the reason why we use markets. For we prefer reality to the dreams of politicians.

At the end of a volatile week for the embattled Turkish lira, President Recep Tayyip Erdogan has called on Turks to convert to convert foreign currency savings into the country’s currency.

The lira, which has fallen about 20 percent this year, hit a low of 4.93 against the US dollar on Wednesday, before Turkey’s central bank raised its top interest rate by three percentage points to 16.5 percent in an attempt to help stabilise the currency.

If Turks do convert currency then that will, obviously enough, have an effect on the value of the lira. Supply and demand does actually work, after all. But it’s not going to be a large effect. The speculative volume of FX trade is always vastly larger than the comercial, or here physical, trade in it. The predictions and suppositions of the speculators are going to be more important that is.

And that’s as it should be because of this:

Prices in Turkey grew at a rapid clip in March, but the pace was little changed from the previous month, offering respite to the battered lira.

The consumer price index rose 10.23 per cent in March from 10.26 per cent in February, according to the Turkish Statistical Institute. The pace cooled from 11.29 per cent in March 2017.

Over the long term FX rates are driven by relative inflation rates. A country with higher inflation will see its currency decline against that of a country with a lower inflation rate. This does not mean that it will all happen gently, as a steady and continuous change. In the short term FX market prices are, as with stock market ones, a random walk. But trend does impose itself over time and it’s those relative inflation rates which drive the trend.

Actually, there’s one manner of defining the peeps who are good at trading on markets. OK, ever so slightly cock-eyed here but still. Those who work out when prices move from that random walk to that trend driven by basic factors can and possibly should make fortunes. We just cannot predict the next, femto-second, move in prices. But we can indeed tell that after a decade a place with a 10% inflation rate will have a lower FX rate than one with 0%. When does the one factor outweigh the other? An hour – no. A day – still no. But under a decade, yes.

It’s also true that we don’t expect Turkey’s inflation rate to change very much – given Erdogan’s own economic policies again:

The statistic shows the average inflation rate in Turkey from 2012 to 2017, with projections up until 2022. In 2017, the average inflation rate in Turkey was at around 11.14 percent compared to the previous year.

And up around 10% or so predicted for the next few years.

It’s those policies driving this not speculative attacks. And yes, this is also why we use markets. For Erdogan’s policies are diminishing the value of money within Turkey. Which is why the external value is also declining, whatever Erdogan would prefer were happening.

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6 years ago

Yup, the very first thing I do after seeing that Erdogan is driving the value of the lira to hell, I pull all my savings from abroad and convert them into lira as demanded of all patriots….

“that will…have an effect on the value of the lira….But it’s not going to be a large effect.” No, nor a long-lasting one. Like releases from the US Strategic Petroleum Reserve, the market sees that it’s a one-time effect, and the long-term trend continues, one source of resistance now having been expended.

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