Is The Turkish Lira Still A Buy After The Municipal Elections?

Includes: TUR
by: Seung Kim


The Turkish Lira has strengthened, as predicted by our last article.

The Turkish Lira has strengthened due to municipal election results and strong economic data.

We recommend remaining net long the Turkish Lira but to take some profits.

On Feb. 5, 2014, we recommended buying the Turkish Lira and Turkish assets (NYSEARCA:TUR) in our article titled "Time to Buy the Turkish Lira?" We believed that the emergency rate hike by the Central Bank of the Republic of Turkey (CBRT) was sufficient to strengthen the Lira in the intermediate term. Since then, the Turkish Lira has strengthened, as can be seen in the USDTRY chart below.

At the time of our recommendation, the Lira was trading at around 2.27 Lira per dollar. The Lira has since strengthened to around 2.14 Lira to the dollar, which is approximately a 6% gain. 6% is a significant move in currencies and the use of leverage would have amplified the gains even further.

Additionally, while the gains from the price movement alone would have led to a decent profit, the chart does not account for the rollovers that the Turkish Lira would have generated. Since we recommended using the USD, EUR, JPY, and CHF as funding currencies the rollovers should have garnered an additional 9% annualized return on the position. Since we recommended the position around two months ago, the position should have gained over 1% in addition to the gains made by changes in the exchange rate.

Recent Developments

The Turkish Lira has been drifting higher since the CBRT raised interest rates, but the most recent leg up for the Turkish Lira was due to the municipal election results where Prime Minister's Recep Tayyip Erdogan's Justice and Development Party (AKP) gave a strong showing. After months of political turmoil caused by protests in Gezi Park, investigations over corrupt AKP officials, and recordings of false flag operations in Syria, the AKP looked ripe for disappointment in the elections. However, a lack of a viable alternative political party and an unwavering party base still enamored with the economic strides Turkey has taken under Erdogan's premiership, resulted in another triumphant showing for Erdogan and the AKP.

Is the AKP Win a Positive for the Lira?

We believe that the Turkish Lira strengthened following the results of the elections, not because of the AKP's victory, but because of the lack of upheaval after the elections. We believe Erdogan will prove to be a detriment to the Turkish Lira in the long run. An increasingly autocratic Erdogan, who in the past has pressured the CBRT on interest rate policies, will undoubtedly look toward loose monetary policy as an easy fix-all for when the economy falters.

Furthermore, Erdogan has often acted upon unsound advice from unfit advisors. For instance, the increase in interest rates may have been delayed because Erdogan took the advice of Yiğit Bulut who did not believe interest rate hikes were necessary. Unfortunately, Yiğit Bulut might be crazy as he also claimed that groups inside and outside of Turkey were trying to kill the Prime Minister via telepathic attacks. Fortunately, for Turkey, both the CBRT Governor Erdem Basci and Turkish Finance Minister Mehmet Simsek seem to be capable men who are able to steer the economy while remaining on Erdogan's good side. We believe that it is poor economic advice rather than political unrest that is the greatest downside risk to the Lira trade. If both Basci and Simsek are able to steer the prime minister to a more sound monetary and fiscal policy, we believe the Lira will continue to strengthen.

While Erdogan himself may not be what the Turkish Lira needs in the long term, the definitiveness of the election results may be good for the Lira in the short term. With Erdogan firmly entrenched, some of the more authoritarian measures recently enacted may hopefully be eased to calm the political volatility that has plagued Turkey. While Erdogan has appeared unforgiving to his opponents in speeches after the election results, we would think that given the diminished chances of losing power would persuade Erdogan not to agitate protestors further in the short term.

The Economy

The Lira has also recently done better on stronger-than-expected economic data. The fourth-quarter data of 2013 showed an unexpected growth of over 4%, which was higher than expected. The current account deficit that market commentators were so quick to point out as a key weakness for Turkey has also come in lower than expected due to the weaker Lira. The hike in interest rates has also made shorting the Lira more expensive and has made buying gold less attractive. In short, the economic data has been coming in favorably for a stronger Lira.

The Trade

While we believe the intermediate outlook for the Turkish Lira is still positive, it never hurts to take some profits off the table. In short, we look to lighten up on the Turkish Lira but maintain a net long position on the Lira. While there may still be volatility in the Lira exchange rate due to political upheavals and scandals, we believe that there is still upside to the trade.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I am long the Turkish Lira for my own personal account and have purchased the Turkish Lira and TUR on behalf of my clients. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.