Turkish Lira and the Fight against ISIS

The Middle East is in turmoil. A civil war in Syria and chaos in Iraq have given rise to a new terrorist faction, the ISIS (Islamic State of Iraq and Syria). This collection of foreign terrorists and members of Saddam Hussein’s military has carved out territory spanning both Iraq and Syria on the Southern border of Turkey. Turkey would prefer that the Syrian government fall and as such had not intervened militarily in Iraq or Syria despite more and one and a half million refugees that flooded into Turkey. However, ISIS terrorists set off a bomb in the Turkish city of Suruc killing 32 people. As a result Turkey has agreed with the USA to carve out an ISIS free zone along its border with Syria and has allowed the USA to use the Incirlik air force base in Turkey for missions against ISIS. Forex traders will be interested in the Turkish lira and the fight against ISIS.

Turkey and the ISIS

The New York Times reports as Turkey wins NATO support for its efforts against ISIS.

The endorsement by NATO allies on Tuesday represents welcome moral support for the government in Ankara. Most importantly, Turkey has given the United States the green light to use its Incirlik air base for manned airstrikes against the Islamic State. The idea is that American and Turkish operations will help forces in Syria that the United States considers relatively moderate to take territory from the Islamic State.

The point of the safe zone will be to shut down routes that ISIS uses to gain fighters and sell petroleum. It may also allow Turkey to send some of the million and a half refugees back to Syria and Iraq. It remains to be seen how well this will work out and what the gain or cost will be to Turkey and the lira.

Instability in Turkey

Bloomberg reports that the lira heads for a record low as Turkey not only bombs ISIS but Kurds in Iraq as well.

The Turkish lira headed for a record low and bonds fell on investor concern the country’s involvement in regional conflicts and the threat of terror attacks on its home turf may complicate attempts to form a coalition government.

The lira dropped 1.1 percent to 2.7667 per dollar at 5:04 p.m. in Istanbul, the worst performance after Russia’s ruble among 24 emerging market currencies tracked by Bloomberg. The yield on 10-year government bonds rose 23 basis points to 9.95 percent, headed for the highest close since Sept. 30. Turkish stocks were set for the lowest finish in more than four months.

Turkey’s military offensives in Syria and Iraq helped fuel the declines, underscoring the fragility of assets in the country that have been caught in a selloff as the Ak Party struggles to form a coalition government and the U.S. Federal Reserve prepares to increase borrowing costs. Reports that the police have intelligence about terror attacks in Istanbul added a fresh element of risk to the $800 billion economy.

Turkey is in the process of forming a coalition government and the combination of terrorist attacks and military activity are not helping. The may well be a negative correlation between the Turkish lira and the fight against ISIS at least in the short run.

Defeat the ISIS and More

As we said, the Middle East is in chaos. Not only are Iraq and Syria embroiled in civil wars but Iran is supporting various regional groups while the gulf oil states, Egypt and Turkey support others. The Financial Times offers their opinion that the issues of Iran and its nuclear ambitions and ISIS are intertwined. To balance the nuclear deal with Iran ISIS needs to be defeated and the various regional governments need to regain stability.

In the next couple of months, the US Congress will debate whether the Iranian nuclear deal is likely to work as arms control. But the bigger debate is whether the agreement, with its relaxation of sanctions, means America is halfhearted – at most – in confronting Iranian sponsorship of so much of the violent chaos that is spreading across the Middle East. That is why the US should choose this moment to develop a serious, full-bodied strategy to defeat the barbaric Islamic State in Iraq and the Levant (Isis) in Syria as well as Iraq.

This strategy confronts Iranian ambitions in both places and would therefore be the ideal companion to diplomacy that stops an Iranian nuclear threat.

This is the goal of the fight against ISIS by Turkey and recovery of the lira.