Ten days ago, on July 15th-16th, there was an attempted coup in Turkey against the government. It failed, but left over 300 people dead and more than 2000 injured. The consequences of the crisis are still unfolding with nearly 6000 military and many more civil citizens being arrested and, according to western media, tortured in Turkish prisons.
On the financial side of things, the Turkish lira has been crashing against the major currencies. Other countries have warned their citizens not to travel to Turkey, making the demand for the lira fall, which leads to its decline against the U.S. dollar, the pound sterling and the euro. It makes sense, but should we just blindly rely on this tendency to continue? As we have always said, news does not drive the markets, so let’s see a chart of USD/TRY, in order to see how the situation looks like through the prism of the Elliott Wave Principle.
On the daily chart of USD/TRY we see that the pair has been moving sideways between 3.0742 and 2.7540 since September, 2015. In addition, the consolidation has developed a contracting shape as time passed. There is one Elliott Wave pattern, which perfectly describes this kind of price action – the triangle. Triangles consist of five waves, labeled A-B-C-D-E, where each wave is smaller than the previous one. They are sideways corrections, which interrupt the larger trend. As you can see, the chart above makes these characteristics easy to recognize. On June 24th, wave E of the triangle was over at 2.8359 so it was time for USD/TRY to resume its uptrend, which has been in progress before that. Therefore, the rally, which began on July 15th is a natural consequence of the pattern, which simply coincided with the coup attempt in Turkey. In other words, with or without a coup, the Turkish lira could be expected to decline against the U.S. dollar, because once a correction is over, the larger trend resumes.
Okay, but what to expect from now on? Should we wait for more news from Turkey? Should we look forward to some announcements by president Erdogan or other government officials? We would rather rely on the information the market provides, because the Elliott Wave principle can tell us exactly what should follow after a triangle pattern. Triangles are known to precede the final wave of the larger sequence. The triangle terminated in wave E at 2.8359, so the following advance is supposed to be the last wave of a larger degree uptrend. Once it is over, a bearish reversal should occur. Right now, it seems that USDTRY has a couple of fifth waves left to make and could probably climb to the area near 3.1500. However, if this is the correct count, this is not the time to join the bulls, because they might be running out of steam. Despite the Turkish political crisis, the lira might start recovering soon, for everyone’s surprise.