The Turkish lira touched a new record low of 3.1140 per dollar on October 18 as the presidential referendum debate and Mosul operation weighed on investor sentiment.

The leader of the opposition Nationalist Movement Party signalled that it would support the ruling AKP’s plans to hold a referendum to change the constitution to pave the way for the establishment of an executive presidential system. The ruling AKP will bring its proposals as soon as possible, Prime Minister Binali Yildirim said on October 18.

Following the statements from the opposition party leader and the government, the lira hit a fresh low of 3.1140, but the currency recovered some of its loses later in the day, closing 0.02% d/d higher at 3.0954. The main stock exchange index, BIST-100, was up 1.16%. The yield on the 10-year bond dropped to 10.02% on October 18 from the previous day’s 10.07%.

The ongoing military operation in Iraq to retake the city of Mosul from Islamic State is also keeping investors on the edge. Turkey insists it should be part of the operation, while Iraq is against Ankara's involvement. Yildirim first said that Turkish warplanes were involved in the airstrikes, coordinated by the US-led coalition. In a later statement, however, he suggested that this has not happened but Turkish warplanes will be deployed when the time comes.

Turkey and the United States have reached an agreement in which Turkish warplanes will join the Mosul operation, Yildirim later told Hurriyet Daily News.

The prospects of another rate cut by the central bank also keep Turkish assets under pressure. The central bank’s monetary policy committee is set to meet on October 20 to review interest rates. Analysts expect the bank to deliver another 25 basis point (bp) cut in the overnight rate to 8%.