Bloomberg
Turkey’s Lira Plunges as Traders Absorb Central Bank Upheaval
(Bloomberg) -- The Turkish lira plunged as much as 15% against the dollar following President Recep Tayyip Erdogan’s shock decision to replace the country’s central bank chief.The decline erased the gains made after ex-governor Naci Agbal was appointed in November, and put the lira within a few percentage points of a record low reached earlier that month.The decision to fire Agbal, who had sought to restore the central bank’s credibility, raises concerns that the country will once again embark on a path of rock-bottom rates. Agbal’s policies to raise rates to tackle soaring inflation had made the lira the best carry-trade currency this year, bringing capital into Turkish markets.“Bulls’ optimism was based on CBRT being allowed to keep rates high for some time, and after last Thursday that looked very promising,” said Henrik Gullberg of Coex Partners Ltd., who previously saw the lira appreciating beyond 6.90 per dollar. “That’s ruined now; it will be hard to find lira bulls,” he said, adding that the currency could now head back to levels when Agbal was appointed.The lira traded at 8.0608 against the dollar at 12:08 p.m. Singapore time after weakening to 8.4707 in early Asian hours when liquidity for emerging-market currencies tend to be thinner. The lira also declined against major peers including the Japanese yen and the euro.A rush to sell the currency as markets reopen overwhelmed support for the lira from state banks, according to an FX trader familiar with the transactions, who asked not to be identified because the person isn’t authorized to speak publicly.“I expect massive state bank intervention in the short term to hold a line on the lira,” said Timothy Ash, a strategist at BlueBay Asset Management in London, adding that he’s not yet sure where the line will be drawn. “The new governor will be dependent on utilizing the reserve bounty that the former governor left him to smooth his entry into the job.”Hold the LineLast year, Turkish banks spent more than $100 billion of the nation’s foreign reserves to support the currency, according to a report by Goldman Sachs Group Inc. That prompted calls by Turkish opposition for a judicial probe into the official reserves.In comparison, foreign investors purchased a net $4.7 billion worth of stocks and bonds in the months following Agbal’s appointment. Overseas inflows to Turkey through swaps were about $14 billion during that period, Istanbul-based economist Haluk Burumcekci said.The lira had strengthened under Agbal’s watch as he ended a complicated funding structure and pledged to ensure price stability. His abrupt removal comes on the heels of a 200 basis-point interest-rate hike on Thursday, double what was expected in a Bloomberg survey, amid accelerating inflation.Agbal’s replacement, Sahap Kavcioglu, pledged on Sunday to use monetary-policy tools effectively to deliver permanent price stability. He also said the bank’s rate-setting meetings will take place according to schedule.Erdogan Ousts Central-Bank Head, Installs Interest-Rate AllyWhat Bloomberg Economics Says“The hit to the central bank’s credibility and independence can’t be overstated. Erdogan has battered the institution with interventions that have repeatedly backfired. Financial markets were willing to give Agbal a chance, his successor will find it hard to build that trust again.”--Ziad Daoud, chief emerging markets economist. For full REACT, click hereAny weakness in the lira could add to inflationary pressures building in the economy and erode Turkey’s real rate, currently the highest in emerging markets after Egypt’s.Authorities may impose capital controls to stabilize markets, according to Per Hammarlund, chief emerging-market strategist at SEB AB. Swings of 15% in either direction are expected as foreign investors flee, the central bank intervenes and bargain hunters come in, he said.“Given the increasingly authoritarian approach that President Erdogan has taken, capital controls are looking like the most likely choice,” Stockholm-based Hammarlund wrote in a note. “Surely they intend for restrictions to remain for a limited time, but that time may last for years.”Japanese PositionsWhile Turkey’s high nominal rates are a lure for yield hunters, its mercurial inflation and the perception that central-bank policy has been too loose has made the lira one of the most volatile currencies in the world.Among those who find themselves on the wrong side of the trade are Japanese retail investors. Long positions made up almost 86% of the total lira-yen positions traded on the Tokyo Financial Exchange on Friday, the most among 14 major currency pairs, based on the latest data compiled by Bloomberg.“We will never know how successful Agbal’s approach could have been, but initial signs were positive,” said Emre Akcakmak, a portfolio adviser at East Capital in Dubai, who anticipates a reversal on some of the recent hot money inflows.“Even when the market stabilizes after a while, investors will have little tolerance, if any, in case the new governor prematurely cuts the rates again,” Akcakmak said.(Updates with quote in 13th paragraph, Japanese positions in 16th paragraph. An earlier version of this story was corrected for the extent of the lira’s decline.)For more articles like this, please visit us at bloomberg.comSubscribe now to stay ahead with the most trusted business news source.©2021 Bloomberg L.P.
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