Turkey, a country of secular tradition, is currently experiencing political turmoil. The two sides to the political conflict are Turkey's secular establishment (consists of the Kemalist military and judiciary) and mildly Islamist government of Tayyip Erdogan's AKP party (which is a loose coalition of conservatives supported by secretive islamists brotherhoods). Although PM Erdogan has been somewhat supported by the West for being a reformer, he has not shied away from pursuing overtly Islamist policies both domestically and internationally. For example, his recent awkward statements about Iran's nuclear program raised some eyebrows in the West. For such similar dubious policies, some political analysts like Michael Rubin have described Mr. Erdogan as an authoritative figure.
Anyway, the current tensions in Turkey center around a highly politicized legal case called "Ergenekon." This legal case is investigating an allegedly secretive organization called Ergenekon which is conspiring to carry out a coup d'etat in the country. Some of the country's leading intellects and ex-military officers have been kept in custody for the last two years without any concrete proof of a conspiracy.
On February 25, 2010, the arrest of about 50 army officers over an alleged coup plot raised tensions between the government and the military. These arrests were highly controversial, as they included some high-ranking retired military officials. Moreover, these type of arrests also harm NATO's operational capabilities by de-moralizing the command structure of the organization's second biggest army.
In sum, these developments are highly dangerous, and could destabilize Turkey's fragile political structure.
There is no doubt that Turkish economic fundamentals have significantly improved following the reforms by Kemal Dervis in 2001. While the Turkish economy has shown significant resilience in the face of the global credit crunch, work still remains to converge the country's economy to a level that is close to the EU average. To achieve this convergence, Turkey definitely needs political stability accompanied by secularism and a pro-Western foreign policy. The post-September 11 world simply cannot afford to have a non-secular Turkey. Opposition parties are already calling for the government to go to early elections, and this option is emerging as the only feasible one to diffuse the current political crisis.
In the short-run, Turkish lira is likely to remain highly volatile and risky. It will be wise to avoid the currency until the current political crisisis is resolved. Perhaps, the anxiety around TRY is most objectively defined by the below graphs, the risk-reversal rate has reached an alarming level and deserves to be taken into account. In the last days, the dollar has broken the Fibonacci resistances against the Turkish currency.
It is worthwhile to take a prudent approach on TRY. (Click charts to enlarge)
Risk Reversal Rates of EMEA currencies
TRY Evolution (Fibonacci View)1M Put Option Premium for TRY
Disclosure: No ownership of the above mentioned positions