Summary:

• Erdogan wins presidential elections in the first round
• Lira stable after the outcome
• Monetary policy crucial for the currency 

Uncertainty was a sky-high on Friday as options market implied a possible 3% move in the Turkish lira in either direction after the weekend’s opening but it proved to be much calmer than that. At the end of the day it turned out that there were no surprises: Erdogan won the crucial presidential elections and his party – while short of the majority on its own – will support him in Parliament. 

Erdogan wins, no second round needed

It’s all clear when it comes to the election result already on Monday as Erdogan got some 53% of the votes in the first round and thus no second round is needed. Indeed his closest rival Muharrem Ince admitted the defeat while adding that it was not a fair race. Meral Aksener who was at one point seen as the major threat to Erdogan got just some 7% of the votes. Second round of the presidential elections would be the greatest source of uncertainty so now that it’s off, the lira has actually felt some relief. 

AKP short of majority, but coalition likely 

Parliamentary elections did not provide Erdogan such a tremendous success as his AK Party got some 42.5% of the vote – not enough to preserve the outright majority it enjoyed during the last term. However, it will still be able to forge a majority coalition with its traditional partner (MHP, 11% of the vote) and even more importantly – the role of the parliament has been greatly reduced. Let us recall that the constitutional reform that was tightly voted in two years ago is now taking effect and will remove the prime minister post, granting those powers to the president instead. So it’s as close to “one-men rule” as it can be.

Lira stable, central bank independence to be crucial

Many expected a wild Monday on the lira but it’s been fairly stable so far and actually it managed to post some narrow gains in Asia. At the end of the day it’s not that surprising – the result is close to expectations and many uncertainties have been removed. However, it’s not said and done – traders will now watch president closely in his relations with the central bank. Let us recall that a massive depreciation of the lira had its source in a reduced independence of the central bank that was under pressure not to raise rates even amid soaring inflation and current account deficit. Faced with a prospect of a currency crisis Erdogan gave a green light for rate increases during the campaign but will he allow the Bank to do its job now that he won the elections? That is absolutely the key question for the markets. Lira needs a period of those high interest rates if it’s about to reverse the course. 

 

Broken trend or not? As you can see the most aggressive trend line has been broken but now the USDTRY test another one with the key support of 4.45 presenting the ultimate barrier. As a result all the scenarios are in play and the next impulse we will see could be decisive. Source: xStation5