Turkey's worsening security situation to weigh on Lira

USD-TRY was barely stable yesterday at 2.76 after reaching a new all-time high of 2.77 on Monday. The global EM sell-off calmed down for the time being, which took some pressure off the lira, but the lira remained weak because of domestic political developments. 

Following MHP leader Devlet Bahceli's call to the Supreme Court to ban the pro-Kurdish HDP party for its alleged links to PKK, the chief prosecutor's office launched an investigation. The prosecutor's office may subsequently file a lawsuit with the Constitutional Court to close down HDP. 

"Crucially, AKP which usually opposes party closures, appears to go along with this flow, according to statements. Perhaps, AKP sees advantage in an early election scenario if there were no HDP", says Commerzbank. 

However, given that the entire regional tension is now concentrated on the Turkey-Syria border, if Kurdish minorities were to be excluded from political participation at this time, with no meaningful representation in Ankara, the security situation in the rest of Turkey would deteriorate, and this affects the political risk premium on Turkey, generally.