(Bloomberg) -- The lira’s volatility has climbed as Turkey’s possible incursion into northern Syria heightens the risk of U.S. sanctions. Still, Turkey is no stranger to geopolitical risk and these levels are well below those reached just a little over a year ago in a bilateral spat.
Traders took heart for most of yesterday from President Donald Trump tacitly approving an incursion, thus suggesting a rapprochement of sorts between Turkey and the U.S. But after Trump started taking flak at home, including from congressional allies, he tweeted that he’d “totally destroy and obliterate” Turkey’s economy if it did anything he considers “off limits.”
That’s sparked the biggest two-day jump in the lira’s one-month implied volatility since mid-August, on a closing basis. The cost of hedging against lira weakness has also surged, according to risk reversals.
If President Recep Tayyip Erdogan sticks to his plan and sends his army into Syria, the move so far this week is nothing compared to what could happen. In August last year, the flare-up between Trump and Erdogan led the former to double some tariffs on Turkish imports.
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