The Turkish lira slumped toward a record low versus the dollar after President Tayyip Erdogan stunned investors over the weekend by replacing the hawkish central bank governor with a critic of high interest rates.
Erdogan fired the central bank governor only two days after a sharp rate hike that was meant to head off inflation of nearly 16% and support the lira.
The new central bank governor likely means a reversal of the hawkish and orthodox steps taken to battle inflation, which could lead to prolonged market volatility, analysts said.
“After regaining investor confidence with a series of aggressive rate hikes, Turkey has snatched defeat from the jaws of victory,” analysts at Brown, Brothers and Harriman wrote in memo.
Then this on the tape:-
LONDON (Reuters) - Societe Generale said the dismissal of Turkey’s central bank governor Naci Agbal had left the country “beyond the point of no return” and predicted the lira to weaken to 9.70 against the U.S. Dollar by end of the second quarter.
In a note to clients, analyst Phoenix Kalen also predicted that new governor Sahap Kavcioglu will try to undo Thursday’s 200 basis point hike at the 15 April monetary policy meeting as well as deploy substantial reserves between now and then to try to stabilize the lira. However Kalen added that Kavcioglu would likely lose the currency battle with markets and may have to engage in emergency hikes to halt the currency’s decline.
“We recommend exiting from any long positions in Turkish assets, considering the profound shift in policymaking and the likely financial turmoil ahead,” Kalen wrote in the note.
“Turkey may soon be headed toward another currency crisis”.
So just digest that. Soc Gen are suggesting exiting from any risk assets in Turkey. That is a huge statement and might I add huge credit to the analyst for the unambiguous remark.
Why do we care in the UK mortgage space? Well directly there isn't much read across for retail punters but what this will absolutely highlight in the coming months is just how asset prices are affected with what is increasingly looking like unorthodox monetary policy. Remember the initial moves by the previous bank chief were to try and control Turkish inflation.