By Sean Hyman, Editor, Currency Cross Trader
Times have been tough for Turkey this year, and they’ve been just as bad for its currency, the lira.
The Turkish lira has been the second-worst performing currency of the year, behind the South African rand.
This year alone, the lira has tumbled 18% – so it hasn’t just been a bad year, it’s been the lira’s worst year ever.
In fact, on December 19, the currency hit its lowest point against the U.S. dollar – with USD/TRY hitting 1.90.
But looking ahead to 2012, I’d say the lira’s tough times are coming to an end.
A micro boom – a term we normally reserve for little pockets of economic growth and investment opportunity in the markets – is now about to take hold of this emerging-market currency.
Turkey Appears to be “On Sale”
You see, Turkey’s huge current-account deficit is up to 10% of GDP right now. However, with the lira being at its weakest level ever against the dollar, it’s going to slow imports, because the local purchasing power has become pretty poor.
And because the dollar has never been stronger in Turkey, the country appears to be “on sale” for those outside of the country.
As the lira falls, USD/TRY heads higher on the chart
In fact, both the dollar and euro have soared against the lira – and that’s really something, because we all know how badly the euro performed this year.
But the lira’s fall was even steeper than the euro.
Get Ready for Some Turkish Delight
That means Americans and Europeans will definitely snatch up Turkey’s “cheap” exports next. Even these two “devalued currencies” still have great purchasing power in Turkey.
And that’s also why the lira is now at an extreme point and poised to turn around in 2012.
In fact, the exchange rate has become so extreme that it will likely help reduce Turkey’s current account deficit from around 10% of GDP to around 7% next year – a huge improvement.
And when the lira begins to strengthen during the first quarter of 2012, that will then help to bring down the country’s lofty 9.5% inflation rate – the 19-month high it hit in November.
When the “Micro Boom” Will Start
Emerging-market currencies like the lira need a stable financial market with lower volatility to flourish.
Here at home, U.S. politicians will continue to drag their feet over the ticking time bomb of our rising debt burden. At the same time, it has become increasingly unlikely that Europe will solve its debt crisis anytime soon.
In the short-term, none of this will be good for stock markets. However, central banks won’t let the markets slide forever.
Their strategy will be to increase the money supply – printing more money, buying bonds and mortgages, etc. At that point, investors will return to buy riskier assets like stocks and emerging market currencies.
And when all of this unfolds, a “micro boom” in the lira will begin.
Before it’s all said and done, I believe USD/TRY will make its way down to TRY1.60 on Turkish strength over the course of 2012.
Also, I believe EUR/TRY will make it back down to the 2.10 to 2.20 level, too.
The Turkish central bank is already trying to do something about its super-weak currency. In fact, last week when the dollar hit its high against the lira, the central bank stepped in and sold as much as $1.7 billion in an attempt to bring down the exchange rate.
While that alone won’t turn around the lira, it is clear that Turkey’s central bank wants a stronger currency for the first time in a long time.
We also know that the super-weak lira will help to bring money into Turkey, and at the same time will stem Turkish spending outside of the country.
All of this is likely to result in a big 2012 lira rally that many traders simply aren’t expecting.
Watch for the tide to turn and get ready to profit handsomely from the lira in 2012.
Have a Nice day!
Sean Hyman, Editor
Currency Cross Trader