Emerging market currencies have been under intense pressure in the past few months as the US dollar has blasted higher. The Turkish lira has been one of the worst performers as the market ignored the actions of the central bank. The USD/TRY pair has soared to over 32.50, its highest point on record.
Why the Turkish lira collapsed.
The Turkish lira has been in a strong bearish trend for a long time, which has eroded the local’s purchasing power. A look at the official chart shows that the USD/TRY pair was trading at 1.1590 in 2008 and has now moved to 32.50. That means that the currency has crashed by almost 3,000% in this period.
The main reason why the currency has collapsed is the unorthodox monetary policy framework that is supported by Erdogan, the president. He strongly believes in low-interest rates even in periods of high inflation.
As a result, unlike in other countries, Erdogan has removed the CBRT’s independence, meaning that he can hire and fire officials at will. He has done that by firing about five officials in the past ten years.
Therefore, there has been a lack of confidence among Turkish residents and businesses, many who have embraced the US dollar even as the central bank hiked interest rates. It has boosted rates from about 8.50% in May last year to over 50% today.
In theory, higher interest rates should make the Turkish lira highly attractive. In practice, however, it is still seen as a toxic currency because of the country’s high inflation rate. The most recent report showed that Turkey’s inflation has remained above 67%.
As a result, the spread between interest rates and inflation stands at about 17%, meaning that lira holders are generating a negative return.
Therefore, analysts believe that the Turkish lira will only rebound when the Federal Reserve starts cutting interest rates and when Turkey’s inflation drops below the current interest rates level. Other analysts believe that this will happen only when Erdogan is no longer in power.
Is Bitcoin a better asset?
BTC to TRY exchange rate
Turkish residents have several ways to hedge against the ongoing collapse of the local currency. A common approach is to invest in Turkish stocks, which have been in a spectacular rally in the past few months.
The closely watched BIST 100 index has jumped to TRY 10,000, up from 225 TRY in 2010, a 4,886% return. That approach has been a good one since the Turkish lira has weakened by about 2,710% in the same period.
The other approach is to hold fiat currencies like the US dollar and the euro. People who did that have had strong returns over the years as the lira has plummeted.
Other investors have moved to cryptocurrencies like Bitcoin, Ethereum, and Solana. That too has been a great investment to hedge against the Turkish lira volatility. Data by Bitfinex shows that the BTC/TRY pair jumped from 293,220 in January 2010 to over 2,525,187, a 750% gain.
Bitcoin has a unique characteristic to fiat currencies. It has a supply limit, meaning that it cannot be manipulated like other currencies like the Turkish lira. I also said the same about the Japanese yen, which has also crashed.
However, it can be highly volatile, meaning that holders can expect to go through major drawdowns.
Contributors
