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Hopes for Turkish lira as it defies the odds

Turkey's lira has regained some ground over the past few months, easing fears of an economic crisis.

Despite the sacking of the central bank governor, and sailing close to the wind after risking US sanctions over Russian missiles, the lira has risen since an eight-month low in May.

The currency has been given a boost by the US Federal Reserve's more supportive stance, which has bolstered emerging markets, including Turkish assets. Now, as the US grapples with China in a trade war, Beijing's own currency devaluation could prompt the US to weaken their own dollar, giving the lira a little wiggle room.

Investors who were wondering how much lower the currency could get are also breathing sighs of relief as reports show the lira is one of the strongest emerging market currencies so far this quarter. Its continued rise depends on whether investors keep buying assets, as well as the Turkish authorities' efforts in restoring trust in the central banks, which in turn will prompt Turks to buy up assets in their own country instead of looking at foreign investments.

Cristian Maggio, head of emerging markets strategy at TD Securities, said that people are "piling into the lira".

“The main factor is external and the Fed being on a path of monetary easing ... and Turkey stands out as the main beneficiary of that.” 

The lira was worth 5.53 per dollar on Tuesday, around 10 percent stronger than the 6.19 in early May. At the time, financial institutions predicted it would reach 6.60 or even 7.00 by year end. These levels would see the currency once again hit crisis levels.

At its worst point last year, the lira lost half its value against the dollar, sending inflation soaring.

Since June, when Erdogan's AK Party lost its mayoral seat after a controversial re-run, Turkish bonds have returned 4.2 percent, the second best in JP Morgan's EMBI emerging markets index. Capital flows have also recovered.



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