A money changer counts Turkish lira banknotes. Picture: REUTERS/MURAD SEZER
A money changer counts Turkish lira banknotes. Picture: REUTERS/MURAD SEZER

Ankara — The slump in Turkey’s lira extended into a seventh day as President Recep Tayyip Erdogan continued his overhaul of the nation’s central bank.

Just over a week since he fired market-friendly central bank governor Naci Agbal, Erdogan replaced his deputy, Murat Cetinkaya, with former Morgan Stanley executive Mustafa Duman. The lira fell on the news, sinking the most among emerging-market peers and taking its slide since Agbal’s removal to 14%.

The lira pared  declines later in the day when Turkey’s new central bank governor, Sahap Kavcioglu, gave currency traders what they wanted to hear, delivering a promise of tight monetary policy. Speaking at the monetary policy authority’s annual board meeting in Ankara, he vowed to use monetary tools effectively and “independently”.

The shock departure of Agbal on March 20 sent Turkish markets into a nosedive that brought back memories of the nation’s August 2018 currency crisis. Seen as a counterweight to Erdogan’s unorthodox view that high interest rates fuel inflation, Agbal’s arrival in November spurred a rally. The lira was about 2% away from erasing those gains on Tuesday.

Analysts had been forced to rip up their lira projections and resort to guesswork as they tried to gauge Kavcioglu.

The currency rout has also upended bets on the lira-rand exchange rate — a popular way to wager on the fortunes of two of the most volatile currencies in emerging markets.

While Agbal was at the helm of the central bank, Credit Suisse analysts had predicted the cross would rise as high as 2.20 in the first three months of the year. At the end of January they flagged the risk of a “shift back to lira-unfriendly policies on the part of the Turkish central bank”.

In early February, TS Lombard said   lira had the advantage over the rand due to its carry trade appeal and economic growth, but warned of “a degree of uncertainty in the authorities’ commitment to orthodox monetary policy”.

Japanese investors

To be sure, there are signs some investors are already using the lira’s dip to get back in.

Japanese retail investors boosted net long positions in the currency by 2,302 contracts on Friday after trimming their holdings by 28,108 in the week through Thursday, according to Tokyo Financial Exchange data compiled by Bloomberg.

But the lira weakness is likely to continue until the next rates meeting on April 15th. According to Per Hammarlund, chief emerging market strategist at SEB, the new governor will need to continue his predecessor’s path of rate hikes to quell the market jitters, whether he wants to or not.

“The lira looks set to weaken until the central bank hikes the one-week repo rate,” Hammarlund said. “The move will be needed as a show of commitment to using interest rates as the main policy tool to fight inflation and to stabilise the lira.”

Hammarlund said he sees the lira breaching 8.50 in the coming days, or at the start of next week. The lira traded down 0.8% at 8.2688/$  as of 4pm in Istanbul. The currency was down nearly 3% two hours earlier.

The Borsa Istanbul 100 Index resumed its decline as the benchmark gauge of Turkish stocks fell 1.5%. The yield on 10-year government bonds added 42 basis points to 19.4%.

Bloomberg

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