LONDON: The slump in Turkey’s lira in the wake of its military advance into Syria has made it October’s worst performing major currency, a move that looks even starker considering most emerging market currencies have powered ahead.

The lira is no stranger to volatility, but this month’s five per cent dive against the dollar stands out when compared to a 1.3pc gain for MSCI’s Emerging Markets Currency Index.

The broader emerging markets rally has been underpinned by signs of a partial trade deal between the United States and China and by stimulus, but Turkey-watchers have been rattled by threats of international sanctions over its actions in Syria.

US President Donald Trump warned on Sunday that “big sanctions on Turkey are coming” having already threatened to “obliterate” its NATO ally’s economy if Ankara’s attack on the Kurdish-led forces in northeastern Syria went too far.

European Union governments also agreed on Monday to limit arms exports to Turkey, although they stopped short of a formal EU embargo on the country which has helped stem the tide of refugees from Syria and other nearby countries.

“I’m struggling to see a positive trigger event (on Turkey) at the moment,” said Allianz Global Investors emerging markets CIO Richard House. “It is just quite staggering what is going on.” Investment banks have also turned against the lira again.

JPMorgan identified the lira, along with Russia’s rouble, as the most exposed to political uncertainties. Goldman Sachs has warned about geopolitics and domestic economic policy, while Rabobank last week questioned whether the lira might be on the brink of another “currency crisis”.

Deutsche Bank cut its “positive” view on Turkish fixed income and Oxford Economics downgraded its stance on Turkey.

Published in Dawn, October 15th, 2019