Hot Seat at Turkish Central Bank to Hurt Lira Bulls

The merry-go-round at Turkey’s central bank is about to bludgeon Wall Street contrarians betting on a rebound in the lira.

Traders need not look far for historical reference. President Recep Tayyip Erdogan has fired three central bank chiefs in the past 21 months.

The turnover highlights how money managers can never get too comfortable with the state of affairs in Ankara. During Naci Agbal’s four-month tenure, Turkish investor anxiety as measured by the lira’s one-month implied volatility eased the most in the world. And after the currency’s hot start to 2021, bank analysts boosted their bullish forecasts even further.

Hot Seat at Turkish Central Bank to Hurt Lira Bulls

Now, Agbal’s dismissal is rekindling fears of a repeat of July 2019, when Erdogan fired Murat Cetinkaya for failing to heed the president’s unorthodox theory that high interest rates cause rather than curb inflation. The lira sank a world-leading 1.6% the next week, the central bank delivered a record rate cut by month’s end and the currency ended the year trailing every one of its peers except Argentina’s peso.

“For veterans on Turkey, this looks very much like a story they have seen several times before,” Hasnain Malik and Patrick Curran, strategists at Tellimer, wrote in a report. “Monday is likely to be a bloodbath for the Turkish lira as markets express their clear and strong dissatisfaction.”

Turkey’s currency has climbed 3.1% this year, beating every one of its emerging-market counterparts, though its position atop the rankings is almost certain to change in the days ahead. Aside from a policy pivot at the monetary authority, the concern among investors is that Agbal’s removal may herald a wider leadership reshuffle at the finance ministry, including the potential return of Erdogan’s son-in-law Berat Albayrak.

“This would be disastrous for Turkish assets and send a clear sign that unorthodox policymaking is back in full force,” Malik and Curran wrote, downgrading their view on the nation’s equities and carry trade.

©2021 Bloomberg L.P.

BQ Install

Bloomberg Quint

Add BloombergQuint App to Home screen.