The Turkish Lira and Turbulence

One thing which seems reasonably clear at the moment is that the Turkish Lira is weathering the most recent bout of emerging market stresses much better than the comparable East European currencies - the Polish zloty, the Romanian leu and the Hungarian forint.

If we take a look at the most recent 24 hour chart for the lira, we can see that it has been holding pretty firm today.



The same cannot be said for example of the Polish zloty:



or for the Romanian leu:





Now of course, 24 hours doesn't make a season, but then these are critical days. Indeed in some ways this is quite a special moment, since it is so obviously a turning point for all manner of things. And since there are good theoretical reasons - at least if you take demography seriously there are - for imagining that the Turkish economy might well prove to be more robust under the strains than some of the Eastern European ones, which are actually much more fragile under the surface, then this difference in the underlying pattern bears examination day by day.

And what a day we have had of it. At one point the Polish zloty was down 0.2 percent to 3.8267 per euro as investors awaited a parliamentary vote on dissolving the assembly scheduled for Sept. 7, a vote which may pave the way for early elections.

On the other hand the lira fell 0.8 percent to 1.3090 per dollar while the Hungarian forint dropped a "mere" 0.5 percent to 256.11 per euro.

But what is interesting to observe is the way the Lira quickly recovered from the loss, while the zloty noticeably failed to do so, and the leu's recovery was much more muted.

In fact the leu fell against the euro for the sixth consecutive day this morning, trading at its lowest level in four months, reaching a 24 hour low of 3.2996, the lowest level since May 9, and was still trading at 3.2963 in late morning trading in Bucharest, down from 3.2700 late yesterday. The slide followed a report showing economic growth is slowing. The point is, however, not that this slowdown was especially bad, indeeed on some arguments it might be welcome, as the Romanian economy could be considered to be showing signs of overheating, rather what is significant is the way in which investors are responding to such news in the context of rising concern about the possibility of a US recession and of a global credit crunch in general. This situation is increasingly leading investors to sell off what are seen as higher-risk, emerging-market assets. Growth in the preliminary reading on Q2 2007 GDP slipped to 5.6 percent, from 6 percent in the first three months, the Romanian National Statistics Institute said earlier today, and the leu has now dropped 3.8 percent in the past month against the euro.


Now such comparisons get to be a little more interesting if we stay with the lira and the leu, and look at the two year euro-cross charts. What we can immediately note - of course, is the battering the lira took in mid 2006, following the crisis which took place.









But if we strip this crisis out we can identify a reasonably similar upward trend in both currencies since mid 2006. Until we get to mid July 2007 that is. Then the turbulence really started to set in. And both currencies took a hit, but what is most interesting to note is how the lira initiates a recoverym which is then - more or less - sustained, while the leu begins a downward march, a march which seems to be steadily continuing.

This becomes absolutely and spectacularly clear when we look at the one month charts. The lira bottoms out somewhere in the middle of the month (remember, upward movement here means decline) while the leu seem steadily to be headed off into the sunset on the right of the chart.

Now lets watch out for what happens next.