Turkey’s lira is seeing its longest run of weekly losses since 1999. This comes as Turkey’s new economic team, led by two former Wall Street bankers, curbs its intervention in the currency market. In the 18 months leading up to President Recep Tayyip Erdogan’s re-election, the central bank spent almost $200 billion of reserves, trying – and failing – to bolster the currency. However, the appointment of the two finance-savvy individuals presents a shift in strategy towards allowing the open market to dictate the lira’s fair value.
Overseas investors seem to like what they see. Last week, foreign investment rose for the first time since December 2017, when data from the central bank showed the purchase of $287 million of Turkish bonds and stocks. As the lira reaches its equilibrium, many foreign investors expect capital inflows to continue increasing. The Turkish government’s backing of the free market, rather than continuous intervention, may also attract foreign investment further.
What Does This Mean for Forex Traders?
Investors, both novice and novices alike, should keep an eye on currencies that are seeing targeted intervention from their governments. While countries like Turkey are shifting towards free-market policies, others, such as China, are ramping up intervention to offset the impact of trade tariffs. Traders should be vigilant when considering investment options in currencies that may be at a high risk of intervention. For instance, a country may try to prop up its currency by buying it massively in the foreign exchange market. A government intervention may dilute the Forex market’s accuracy, creating potential difficulties for traders.
With these in mind, traders should proceed with caution. It’s tempting to try to time the market and trade on movements caused by intervention. However, things could take a turn for the worse without notice. A sudden change in government policies could severely impact the stability of a currency’s value. Intelligent investors should also be wary of the overconfidence bias that may creep in during a period of stability/optimism. Blind faith in the government’s capability to maintain a currency’s stability can easily lead to losses. Trading wisely, while exercising caution, is the key to safeguarding investments.
Turkey’s lira has been seeing weekly losses, but with two financial experts manning the economy, the country is moving into a new phase, one where heavy government intervention is no longer the order of the day. For investors, this is an excellent time to keep an eye on the lira and Turkey’s economy to assess the impact on foreign investment, bonds and stocks. The shift towards free-market policies may be beneficial to investors and traders if the economy and investor sentiment can maintain stability. However, forex traders need to be aware of political instability and potential shifts in government policies that could have negative impacts on the lira and trading in general.