USD/TRY Retests 7.8 As Inflation Surges, Geopolitical Tensions Escalate

The Turkish lira’s recovery since hitting all-time lows against the US dollar and the euro has stalled. The currency is once again testing 7.8 per dollar amid ballooning inflation and rising geopolitical tensions in the region. Global financial markets have been apprehensive about Ankara’s potential involvement in the Armenia-Azerbaijan conflict, with President Recep Tayyip Erdogan supporting Baku in the renewed battle.

According to the Turkish Statistical Institute, the consumer price index (CPI) rose 0.97% in September, up from 0.86% in August. The market had penciled in a gain of 1.35%. The inflation rate climbed at an annualized rate of 11.75% last month, slightly less than the 11.77% year-over-year jump in the previous month.
Producer prices also increased a month ago, with the producer price index (PPI) popping 2.65% in September. But it was the big 14.33% year-over-year surge last month that sparked attention.
On Thursday, all eyes will be on foreign exchange reserves, which have cratered to a 15-year low of a little more than $42 billion. The central bank has been depleting its forex reserves to support the lira, which has crashed to multiple lows this year amid a dwindling economy and central bank mismanagement.
Finance Minister Berat Albayrak forecast that the economy would grow 0.3% this year, but the European Bank for Reconstruction and Development anticipates that the economy would contract 3.5% in 2020.
Turkey’s economic prospects are being threatened after several European Union governments have urged the trade bloc to slap sanctions on Ankara over its oil and gas exploration efforts in the Mediterranean.
Investors say that the Armenia-Azerbaijan will be the primary driver of the lira until the conflict has been resolved. Although the Turkish government has rejected any military intervention, other nations have accused Erdogan of sending Syrian mercenaries in the disputed territory of Nagorno-Karabakh. Ankara has made it clear that it supports Azerbaijan, stating that Armenia is a threat to peace. The border has been under dispute since the fall of the Soviet Union.
A treasury department trader at one bank told Reuters:

The tension between Armenia and Azerbaijan and many other subjects have become jumbled together. We think a return of foreigners to the Turkey portfolio may be much slower.

But foreign policy observers may need to be concerned about reports that Erdogan is considering a new offensive in Syria over the presence of Kurdish forces. He reportedly said at an event:

When we destroyed the terrorist corridor that was being built along our borders, we showed that our Syrian brothers were not alone. The terrorist zones that still exist in Syria must either be cleared as promised, or we will come and do it ourselves.

The USD/TRY currency pair rose 0.39% to 7.7951, from an opening of 7.7637, at 15:30 GMT on Tuesday. The EUR/TRY advanced 0.4% to 9.1869, from an opening of 9.1500.
If you have any questions, comments, or opinions regarding the Turkish Lira, feel free to post them using the commentary form below.

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