Four Charts to Show How Traders Are Taking Erdogan at His Word

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It’s difficult to overstate what a turnaround week it’s been for Turkish markets.

The cost of insuring the country’s debt against default has tumbled the most in more than a decade. The average yield premium investors demand to hold the country’s dollar bonds instead of U.S. Treasuries has narrowed the most since the first week of June. And the Borsa Istanbul 100 Index is heading for its best week in at least 10 years.

But it’s the lira that’s registered the most impressive recovery. After briefly sinking below the Brazilian real last week to become the worst-performing emerging-market currency this year, it has since rallied more than 10% against the dollar, retracing about a third of its 2020 losses. The currency is set to post the biggest weekly gain since its recovery from a devastating financial crisis in 2001.

What triggered the revival was a shakeup at the heart of Turkish financial management after President Recep Tayyip Erdogan first fired the country’s central bank chief and then suffered the unexpected resignation of his Treasury and Finance Minister. More surprising still was Erdogan’s pledge on Wednesday to implement “bitter-pill policies if needed” to steady Turkey’s economy, fueling speculation policy makers will lift interest rates next week.

Four Charts to Show How Traders Are Taking Erdogan at His Word

As markets embraced Erdogan’s messages, Turkey’s five-year credit default swap premiums posted the biggest drop since the global financial crisis of 2008. The cost of insuring Turkish assets against default using CDS declined to their lowest since March, when the spread of Covid-19 sent markets across the world into a tailspin.

Four Charts to Show How Traders Are Taking Erdogan at His Word

The lira recovered this week beyond the level seen before the central bank’s meeting on Oct. 22, at which policy makers led by Murat Uysal unexpectedly held back from raising the one-week repo rate, a decision that sent the lira into a nosedive. The dollar-lira cross has since declined below its 50-day moving average for the first time since July, a possible indication of more gains to come.

Four Charts to Show How Traders Are Taking Erdogan at His Word

As investors began snapping up Turkish assets again, expected swings in the lira soared. The dollar-lira pair’s implied volatility is approaching the 1 1/2-year high it reached Aug. 7.

Four Charts to Show How Traders Are Taking Erdogan at His Word

The central bank’s Nov. 19 meeting is shaping up to be a watershed moment for the lira. With Erdogan’s apparent blessing, the new central bank Governor Naci Agbal is expected to enact a rate increase that would further shore up the currency.

©2020 Bloomberg L.P.

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