Turkey’s ties with US are critical for markets

The recent appreciation of the Turkish Lira against foreign currencies has been cited as an example showing that the markets have responded positively to the Turkish military’s operation in the northern Syrian district of Afrin. Actually it would be more correct to say that the markets have responded positively not to the operation itself – but rather to the fact that it was prompted by no huge argument with the United States, as had been feared.

The broader fall in the value of the dollar globally is clearly the real factor behind the recent appreciation of the Turkish Lira.

With the expectation of a rise in the U.S. foreign trade deficit, the value of dollar has fallen against almost all currencies. It has fallen to around 3.75 levels in Turkey and if it drops further it will almost certainly be because of the dollar’s broader loss in value. In other words, the Afrin operation or some other positive domestic developments in Turkey will have little role in any future loss of the dollar’s value.

Due to statements coming from the United States before the Afrin operation and in its early hours, markets had started to worry about the “danger of Turkey-U.S. tension.” Yet the toning down of reactions from the U.S. and the international community this week diminished the effects of Afrin in foreign exchange currencies.

The market players I have spoken to also referred to the importance of domestic statements about Afrin aimed at comforting the markets, which they say had a positive impact. Because the global environment is currently good, they add, the mood that business is getting back to normal has started to prevail.

What happens next is not yet clear. I know personally from my conversations that market players who continue to earn money in line with the positive mood are wondering whether – and for how long - this positive mood will continue.

Erdoğan–Trump conversation

Perhaps the key factor determining the mood in the markets is the tendency in the global financial sector and the continuation of flows of funds to developing countries. But if that appetite diminishes and the flow to Turkey slows down the lira will be impacted just like every other currency. 

Are there extra risks specific to Turkey? The possibility of negative developments that market players fear - like a contention with the United States – is certainly not off the table. Recent statements from the government that after the Afrin operation the focus will turn to the Syrian Kurdish People’s Protection Units (YPG) in Manbij brings with it the danger of such a risk taking shape 

The telephone conversation that took place between U.S. President Donald Trump and Turkish President Recep Tayyip Erdoğan on Jan. 24 was important in this framework. We will need to closely monitor the atmosphere that will now take shape in the next few days and keep an eye on statements coming from Washington.

Market players are also worried about the consequences of manipulative news, so one must also acknowledge that in order to access more reliable news sources on Turkey they are currently feeling the need to follow the foreign media more than ever.