(Bloomberg) – The Turkish lira plunged as much as 15% following President Recep Tayyip Erdogan’s shock decision to replace the country’s central bank chief.
It is quoted at 8.1012 at 10:53 am Sydney time after weakening earlier to 8.4707 per dollar. It has wiped out more than four months’ gains since the current former governor Naci Agbal was appointed in November, reaching the lira within a few percentage points of a record low reached earlier that month.
Erdogan’s decision to abandon central banker Agbal, which sought to restore the credibility of the central bank, is a blow to investor confidence and raises concerns that the country will once again start a path away from the bottom line. The initial setback exceeded the analysis of some analysts and is a rapid reversal of investors’ enthusiasm for the Turkish markets. The seemingly saturated appetite has made the lira the best foreign exchange market this year, with money executives encouraging Agbal’s drive to raise interest rates and efforts to keep inflation under control.
“The Bulls’ optimism was based on the fact that CBRT was allowed to keep rates high for some time, and after last Thursday it looks very promising,” said Henrik Gullberg of Coex Partners Ltd., who had previously seen the “It is now devastated; it will be difficult to find lira bulls,” he said, adding that the currency could now return to levels when Agbal was appointed.
New promise
Agbal’s replacement, Sahap Kavcioglu, on Sunday promised to use monetary policy instruments effectively to deliver permanent price stability. He also said that the bank’s interest rate meetings will take place according to schedule.
According to an FX trader familiar with the transactions, the rush to sell the currency in thin liquidity as trading in Asia intensified support for the lira of state-owned banks, which asked not to be identified is not because the person is not authorized to speak in public. .
“I expect major state bank intervention to keep a streak on the lira in the short term,” said Timothy Ash, a strategist at BlueBay Asset Management in London, who said he was not yet sure where the line would be drawn. “The new governor will depend on the reserve price that the former governor left him to facilitate his entry into the post.”
Erdogan removes head of central bank, installs interest rate partnership
Any weakness in the lira could contribute to the inflationary pressure building up in the economy, eroding Turkey’s real rate, which is currently the highest in emerging markets to Egypt.
“The shock that central banker Agbal unleashed this past weekend could inflict a fatal blow on investor confidence in Turkey,” Win Thin, head of Brown Brothers’ global currency strategy Harriman & Co., wrote in a note. “At this stage, it does not matter who Agbal’s replacement is or what they say, because it is clear that Erdogan is running the program. USD / TRY is likely to test the highest point near 8.58. ”
The lira strengthened under Agbal’s watch when it ended a complicated financing structure and promised to ensure price stability. Its sudden removal comes on the heels of an interest rate hike of 200 basis points on Thursday, twice as much as was expected in a Bloomberg survey, amid accelerated inflation.
What Bloomberg Economics says
‘The hit on the credibility and independence of the central bank can not be overestimated. Erdogan has plagued the institution through interventions that have repeatedly backfired. Financial markets were willing to give Agbal a chance, his successor will find it difficult to rebuild confidence. ‘
–Ziad Daoud, Chief Economist for Emerging Markets. Click here for full REACT
Although Turkey’s high nominal rates are a lure for yield hunters, the mercury inflation and the perception that the central bank policy was too loose for the prevailing economic conditions made the lira one of the most volatile currencies in the world.
“We must conclude for the time being that Kavcioglu will be given the mandate to lower and keep rates as low as possible,” said Cristian Maggio, head of emerging markets at TD Securities in London. “If this hypothesis is true, not only will we see a looser policy-making in Turkey in the coming months, but we will probably also return to policy-making through unorthodox measures.”
Last year, Turkish banks spent more than $ 100 billion of the country’s foreign reserves to support the declining currency, according to a report by Goldman Sachs Group Inc. This led to calls from the Turkish opposition for a judicial inquiry into the country’s official reserves.
In comparison, foreign investors bought Turkish shares and bonds in the months following Agbal’s appointment, only $ 4.7 billion. The overseas inflow to Turkey through barter transactions was about $ 14 billion during the period, said economist Haluk Burumcekci, Istanbul.
Among those who may find themselves on the wrong side of the trade are Japanese retail investors. According to Tokyo financial information, the long positions of individuals in lira-yen on Friday were 263,585 contracts. They have climbed by about 9% since the beginning of the year.
“We will never know how successful Agbal’s approach could have been, but the initial signs were positive,” said Emre Akcakmak, a portfolio adviser at East Capital in Dubai. and big hot money flows in in light of the unexpected decision.
“Even when the market stabilizes after a while, investors will have little tolerance, if any, if the new governor were to lower rates early again,” Akcakmak said.
(Updates with quotes from Brown Brothers and the latest prices)
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