My preferred trading style is to buy on dips and sell on spikes. The Turkish Lira has fallen off a cliff over the last couple of months and it's starting to look like a tempting buy. To sweeten the deal, there's also the positive carry, which comes up to about a dollar a day for every $10,000 position.
Even though the currency has lost more than half its value in the last five years, it is still a little too risky for my liking. Here's a sampling of the major risks:
Too much USD debt (as % of GDP). As the Fed raises interest rates, it becomes harder to pay these debts back. Misery is further compounded by the weakening Lira.
Monetary policy lunacy. Inflation is running at around 10% and Erodgan wants to cut interest rates instead of raising them. Goodbye price stability.
Ultimately, Turkey is caught between a rock and a hard place. If they raise the interest rates, then that cools the economy, lowers GDP and they might have trouble paying back all their external debts. Let interest rates remain as they are, the lira falls in value and they again have trouble paying their debts.
If anyone ever needs a reminder about not to catch a falling knife, then Argentina would make a good case study.
In 2008, the Argentine Peso was hovering around 2 to the USD. In 10 years, that has fallen to 28 to the USD. That 14x drop is also a reminder of how cryptocurrencies are a safeguard to reckless Central Bank policies.
All in all, the lira might be in for some more pain and as tempting as the interest is, the risk is too much to bear.
