Turkish Lira on All-Time Lows

The Turkish lira and the Turkish stocks have miraculously reborn in the last two weeks. On the bottom, in early November, traders gave 10 liras for a euro and 8.5 for a dollar. These were new all-time lows for the Turkish currency. Today, Friday, the euro moves only slightly higher than 9, and the dollar, 7.6. (Charts 1 and 3.)

The TUR ETF fell to the deepest levels in more than a decade, not seen since the Lehman-crisis in 2008-2009. (TUR is the code of “iShares MSCI Turkey ETF”, a US exchange-traded fund for the Turkish stock market.) Turkish stocks were cheaper now than at any time in the last 12 years, at least in euro- and dollar terms. But in the past two weeks, TUR skyrocketed to $23.70 from $17.60, a jump of 35 percent.

The Reasons of the New Bottom

What was the problem with the Turkish Lira and Stocks? It could be a very long list. In brief, Turkey is struggling with economic, financial, and political crisis for years. Approximately half of a decade. Inflation is in the two-digit territory, 11.89 percent in October. The currency reserves of the country were shrinking. The politics–the mighty president, Recep Tayyip Erdoğan–didn’t support the classic stabilization method of the central banks, the rate hikes. The foreign debt is also on very high levels.

So many international investors were fleeing from the country, selling stocks, bonds, Turkish lira, everything. “Risks are unbearable”–wrote an analyst on SeekingAlpha. But only in a few days, the sentiment changed a lot. The president of the central bank (TCMB) was fired, and the finance minister resigned. The new central bank president increased the primary interest rate this week, Thursday, from 10.25 percent to 15 percent. (“One-week repo auction rate”.)

The Rebirth of the Turkish Lira

The market reactions were hilarious. The Turkish lira and shares surged again, after the previous faith-driven correction of the last week. Some commentaries in the press:

• Erdoğan promised an orthodox monetary policy to investors.
• Lira had its best week in the last twenty years.
• Bank stocks soared more than thirty percent.
• The rate hike fueled speculation President Recep Tayyip Erdogan will make good on a pledge to return to market-friendly policies.
• The decision was the first test of Erdogan’s promised pivot toward more orthodox policies.
• Investors will demand consistency from the central bank in the months ahead. (SeekingAlpha.com, Bloomberg.com)

But analysts and investors are still cautious or distrustful. They are not sure whether the sudden change in economic policy will last. The press cited many other opinions that the next economic policy decisions are important to trust in the new direction.

According to my experiences, assets at 12-15 years lows often perform spectacular jumps, “rebirths”. These are exceptionally hated, or forgotten, oversold, under-weighted assets. I call these stories “Tales from the Crypt.” (It was also the title of an old TV series of the 90s.)