Presidential Runoff Election and its Impact on the TRY/USD Dynamic

In a tense economic climate where the lira's stability is paramount, Turkey’s central bank is implementing a comprehensive strategy to protect its national currency ahead of the runoff presidential election. President Recep Tayyip Erdogan’s unexpected momentum following a recent ballot is fuelling these efforts.

The central bank recently decreased local lenders’ daily limits for purchasing foreign exchange on the interbank market. This move is part of a wider attempt to alleviate pressure on the lira, according to anonymous insiders. Moreover, corporate requests for hard currency are being redirected to the non-deliverable forwards market unless they have immediate needs, thus demonstrating the measures being taken to reduce dollar demand.

Turkish authorities are accelerating their strategies to stabilize the lira, which is regarded as a critical gauge of the country’s economic health. The expectation of a devaluation in the lira regardless of the election's outcome has increased the demand for dollars. This is further intensified by Erdogan’s policy of ultra-low interest rates which have left Turkish assets vulnerable.

Cagri Kutman, Turkish markets specialist at London-based KNG Securities LLP, said, "On the FX side, one should not expect anything new from the central bank until the runoff." This means that access to FX will be limited and costlier for retail investors.

A crucial aspect of the agenda involves persuading people to release their dollars. A new regulation was introduced that requires banks to convert their customer funds from hard currency to liras. If lenders fail to comply, they must purchase low-yielding government bonds under the central bank's unconventional policy. This policy has added an extra 10% conversion target, effective between May 26 and July 28.

In other measures, restrictions on the use of credit cards for cash withdrawals and gold purchases were imposed. This aligns with Erdogan's eccentric economic policies that have led to a decline of over 80% in the lira’s value against the dollar since 2018. The lira has further lost nearly 1% against the dollar since Sunday’s initial round of voting.

Subsequently, there has been a marked increase in the cost of insuring against a sovereign default, with average yields on Turkey’s dollar bonds exceeding 10% for the first time since October, according to Bloomberg indexes.

While a victory for the incumbent Erdogan could prolong such unorthodox economic practices, the market's primary focus is on potential changes in leadership and, consequently, monetary policy.

Cagdas Dogan, research director of Istanbul-based Tera Yatirim, noted the central bank’s changes would likely "push up lira deposit rates and push down lira government bond yields." This statement followed reports of the Turkish lira (TRY/USD) continuing to slide and market analysts suggesting that the pair's new highs hint at a strong general upward trend for the dollar against the lira.

As "Trading News" analysis indicates, any fall in the dollar against the lira presents an opportunity to buy again due to the anticipated changes in monetary policy post-elections. Therefore, careful adherence to these numeric trends and diligent capital management is advised.

In the political landscape, a runoff seems inevitable as no candidate secured 50% of the votes in the first round. Erdogan's primary challenger, Kemal Kilicdaroglu, secured approximately 43.12% of the votes. Kilicdaroglu, a retired civil servant and the leader of the Republican People’s Party (CHP), has a strong support base from several opposition parties.

The contentious issue of Turkish inflation, which remained at a high 43.4% YoY in April, is a significant factor in this election. High price pressures coupled with concerns about a potential surge in inflation later this year put Erdogan under scrutiny, and a notable drop in inflation might necessitate a shift 

in policy to a significantly tighter monetary stance. Thus, "Trading News" believes that the central focus for market participants will undoubtedly be a potential leadership change and its subsequent impact on monetary policy.

Erdogan's monetary policy, which is largely characterized by low interest rates and has been highly criticized both locally and internationally, has intensified the country's economic struggles. This unconventional approach is seen as a factor that has led to a sharp depreciation in the value of the lira since 2018. Market participants are watching for signs of change, with Kilicdaroglu vowing to restrict the powers of parliament if elected.

In the midst of these developments, the Turkish Central Bank held rates steady in April, declaring the current monetary policy as sufficient to facilitate recovery, especially in the wake of the recent earthquake. The Bank emphasized the need to keep rates low and financial conditions supportive, aligning all policy instruments with “Liraisation” targets.

However, the Central Bank's challenge of maintaining the Lira's stability is escalating as election data trickles in. "Trading News" expects that the bond yields will continue to face upward pressure as market participants seek changes in monetary policy following the elections.

Looking ahead, with the runoff election only weeks away, volatility in the currency markets is expected to persist. The USDTRY pair is ticking higher, and the absence of a clear victor in the elections means that any changes could be driven by the US dollar.

As the June 1 deadline for the US debt ceiling decision approaches, the anticipation is likely to generate greater volatility and possibly lead to a rise in short-term US yields. Any agreement on the debt ceiling could exert downward pressure on USDTRY, while a lack of a resolution would likely keep the US dollar supported in the near term.

Given the current circumstances, "Trading News" posits that a continued rise in the US dollar or a weakening of the lira could see a new all-time high above the 20.00 mark. In the event of a USDTRY sell-off, support is anticipated around 19.28, in line with the 50-day MA.

All in all, as we wait for the presidential runoff election, the Turkish economy is at a critical crossroads. The potential change in leadership might bring about a shift in the monetary policy that could have far-reaching implications. As the Central Bank's measures attempt to protect the lira and maintain stability, "Trading News" advises investors to pay close attention to these developments and align their strategies with the evolving economic and political landscape.