USDTRY: Turkish Lira at Risk of Declining on Turkey Entering Syria

Yesterday, the Turkish Lira experienced a sharp decline vs. the US Dollar, and the USDTRY pair was close to breaching its August 23 high of 5.86. A move higher in the USDTRY pair means that the Turkish lira is declining vs. the US Dollar.

The reason for the move higher in the USDTRY was Tweets by President Trump where he threated to “totally destroy and obliterate the economy of Turkey.” He was also referring to the 2018 episode when Turkish lira lost about 50% of its value as the US introduced sanctions against the Turkish economy.

The background for the latest threats is to warn Turkey not to do anything that the US would not like as the US military is backing away from the north of Syria. It is not clear precisely what the US would like to avoid, but President Trump has made it clear that Turkey needs to watch over captured ISIS fighters and families.

Technically, USDTRY is capped by the August 23 high of 5.86, and a break to the high could trigger an inverse head and shoulders pattern with a target of 6.25, which happens to be near the May 2019 high of 6.2467. The trend will also remain upwards as long as the USDTRY trades above the September 30 low of 5.62, but caution is warranted as Turkey is yet to do anything that might upset the US. For now, the move higher in the pair is due to speculations of what may happen. Therefore, unless something happens in the next few weeks that could send the price higher, there is a good chance that tensions will cool down and the USDTRY will not be trading much different from today’s levels.

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USDTRY Chart

USDTRY Chart

There are several things that could trigger the US to take economic action against Turkey.

Most of northern Syria is currently controlled by the US-backed Syrian Democratic Forces (SDF) which include Kurdish, Arab, and Assyrian/ Syriac militias. The group is led by the People’s Protection Units (YPG), a mostly Kurdish militia, which has close links to the Kurdistan Workers’ Party (PKK).

PKK has been in a violent fight with the Turkish government since 1984, as the PKK tries to gain greater independence for Turkey’s Kurdish minority.

Turkey says they want to create a buffer zone along its border with Syria, and build ten complete towns and 140 villages to help the about 3.6 million Syrian that fled to Turkey to be able to return to their home. The north part of Syria has also crude oil production facilities, that ISIS used to build their power base, in fact, it was in this part of the country they could rise to power.

The intentions of Turkey were not received well with the SDF, and there is a risk that there will be military confrontations between Turkey’s army and the SDF, causing the SDF to use resources to fight the remaining ISIS forces to help against Turkey. The chaos could help ISIS to rebuild.

There are also about 760,00 civilians already living in that region, and they will probably find themselves in the crossfire.

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