• Turkish lira drops by 11% since Friday
  • Erdogan hints at capital controls
  • Contagion is starting to spread to Europe

The forex trading week has barely started and the situation is already looking very bad for the Turkish lira. The USD/TRY is now trading at nearly 7.15, which means a drop of 11% for the lira since Friday.

Turkish President Recep Tayyip Erdogan’s strategy currently entails pleading with businesses and ordinary people not to withdraw any more funds from the country. This only highlights the hopelessness of the situation, and perhaps gives a hint of things to come.

Erdogan said: “It is industrialists’ duty too to keep this nation on its feet. Otherwise we will set into motion our plan B and C.”

He appears to be hinting that controlling the flow of capital might be on the cards. The problem with this kind of warning is that it actually encourages people to get their money out of the country as quickly as possible, before they can no longer do so.

Should the banks stay open, however, they might well be weighed down heavily by foreign capital obligations. Without the IMF’s intervention, a positive outcome is difficult to imagine.

As far as trading is concerned, one broker is offering a bid-ask spread of 7.10/7.34, which is the type of spread that probably does not make a lot of sense.

With the Turkish Lira having gone into freefall, concern is starting to spread to other developing countries and European financial markets as investors question whether the fact that so many European banks are heavily exposed to Turkey might cause another financial crisis in Europe.

Beyond the developments in Turkey, there is not much on the economic calendar that is expected to impact the euro this week.

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