Turkish lira rallies on results of weekend election as Yuan weakens to lowest level in six month on trade war fears

The Turkish lira rallied sharply in early trade Monday, following the news that Turkish president, Recep Tayyip Erdogan, has won the weekend election. The lira advanced as much as 3 percent with the currency currently standing as the only emerging market’s to be trading higher against the United States dollar.

Analysts say the improved sentiment in the lira is likely linked to the confirmation of continued political leadership in the country, but see some underlying concerns.

“There will be some underlying concerns over whether this buying momentum for the lira could actually last, especially when you consider that fears over the repercussions of an Erdogan victory had been one of the primary drivers behind the collapse in the Turkish Lira over the first half of 2018,” said Jameel Ahmad, global head of currency strategy and market research at FXTM, adding that there is every possibility that the rally in the lira could be temporary.

The currency had weakened beyond 20 percent during the first half of 2018, with one of the main contributors behind its weakness being that Erdogan had promised to become an influence in economic matters and central bank policy if he won the election.

Whether the lira can actually maintain its strength over the next couple of days, according to Ahmad, will be somewhat reliant on how international investors react to the news that Erdogan will have an extended rule of power in Turkey.

Investor confidence in Turkey has suffered in the aftermath of fears that central bank independence would be at heavy threat in the event of an Erdogan victory, and it will take some serious convincing for investors to move back into Turkish assets.

“The possibility that the impressive rally this morning in the Lira could just be temporary shouldn’t be ruled out. I would expect investors to closely monitor the developments in Turkey over the upcoming period. If there is an air of calm within Turkey it would be seen as a positive for the Lira, however any reports that the central bank will be instructed to significantly lower interest rates would be seen as a major threat for the currency,” Ahmad stated.

The other major headline in the FX markets Monday is news of the Chinese Yuan weakening to its lowest level since December 2017.

Fears over the possible ramifications that a trade war between the United States and China would have on the Chinese currency appear to have encouraged the Yuan to withdraw its previous gains in 2018 against the dollar. Year-to-date, the Yuan has now lost nearly 0.3 percent. It was previously seen as one of the best performing emerging market currencies this year.

There is speculation that the People’s Bank of China (PBoC) might be deliberately weakening the Yuan in an effort to strengthen the Chinese economy, in the event that the world’s two largest economies do actually get involved in a trade war. The central bank reduced the reserve ratio requirement for commercial banks by half a percentage point over the weekend, which some have attributed to providing the local economy with some ammunition should the trade war concerns with the United States intensify.

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