Two Way Risks For TRY As Referendum Approaches

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Recep Tayyip Erdoğan, President of Turkey

Focus Shifts Away from Europe & US

While focus over the last year has mainly been on political events happening in Europe and America, there are important political events happening elsewhere that also require investor attention. One such event is the upcoming constitutional reform referendum being held in Turkey this coming Sunday.

The referendum will ask the nation to decide whether to convert the ceremonial presidential role into an office with full executive power with limited oversight from parliament. This change would make the president the head of this executive branch, suppressing the prime minister’s role.  As head of the executive, the president would be able to issue decrees, call general elections and appoint or dismiss high-level officials – including deputy presidents and prime ministers. The president would also be able to directly assign 12 of the 15 constitutional court judges.

Risks Posed By This Change

In its March 1th report, the Venice Commission warned that such a change risks the “danger of degenerating into an authoritarian rule.” Previously, the Council of Europe’s Assembly had called for Turkey to be placed under “formal scrutiny” by a monitoring committee that keeps watch over respect for fundamental freedoms as well as the rule of law and democracy.

This committee also warned that the new executive would “undermine constitutional checks and balances, the separation of powers and the independence of the judiciary”. As such, a “yes” vote could see the EU question the status of the accession process which has contributed to the anchoring of the country’s economic and institutional direction for the past twelve years.

Market Reaction to A “No” Vote

A “no” vote would likely cause early elections and change very little in the current balance of power, maintaining the status quo in Turkey. In this instance, the market reaction is likely to be one of relief with Turkish equities, sovereign bonds and the Lira all rallying. The decision would be viewed by investors as supportive of political stability, and longer term investors into the country are likely to maintain their exposure.

Market Reaction to A “Yes” Vote

A “yes” victory would be a defining moment in Turkey’s political history and could be viewed by investors as negative for political stability as regime changes are often volatile risk-prone events.  As such, the market reaction to a “yes” vote is likely to see Turkish equities, sovereign bonds, and the Lira all selling off.

However, the depth and duration of the sell-off will be dependent on the aftermath of the decisions and how quickly and smoothly reforms are implemented.  Merely the act of holding the referendum and reaching a decision will be seen as alleviating a great deal of the political uncertainty in the run-up to the event and so, while the reaction in sovereign bonds could be more sustained, equities and the Lira are vulnerable to a post-election rally which highlights the volatility and risk around the event.

Technical Perspective

The sharp rally in USDTRY over 2016 has ground to a halt over recent months, as shown by the contracting triangle pattern which highlights the indecision and uncertainty in the market leading up to this referendum.  Weakness in the Lira on the back of this event would see the triangle break to the topside where the first target would be a retest of the triangle top at the 2017 highs. On the other hand, a downside break on the back of a stronger Lira has the December 2016 low as its initial target, and beyond that, there is open water down to a retest of the 2015 and mid-2016 – highs between 3.0795 and 3.1126.



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