Turkish Lira Comes Under Fire as Traders Fret Over Central Bank Resolve

The Turkish lira tumbled amid speculation the central bank may backtrack on policies that fueled this year’s biggest rally in emerging markets.

The currency fell as much as 2% after the policy maker tightened liquidity by boosting reserve requirements, raising concern the monetary authority was shying away from outright interest-rate hikes. The selloff was exacerbated as global risk appetite faltered, with 10-year U.S. Treasury yields spiking to the highest level in a year.

Turkish Lira Comes Under Fire as Traders Fret Over Central Bank Resolve

It’s a reminder of how fragile investor sentiment remains, despite an aggressive tightening cycle that propelled a 15% advance in the currency from a record low late last year. With global financial conditions tightening again, traders remain wary that the central bank is under political pressure not to raise borrowing costs further even as the lira begins to falter.

“Some market participants may interpret it as the central bank being unable to deliver tightening through a regular hike,” Goldman Sachs International analysts including Murat Unur wrote in an report to clients. “Especially because the decision comes at a time when the lira has been underperforming.”

The currency fell for a third day to 7.2489 per dollar, the weakest level since Feb. 1, leading losses across major currencies. It trimmed its decline to around 1% as of 7:38 p.m. in Istanbul.

Wednesday’s rout comes as President Recep Tayyip Erdogan defended former Treasury and Finance Minister Berat Albayrak’s performance this week. Albayrak, who is also Erdogan’s son in law, unexpectedly resigned in November, just days after the president sacked then central bank governor Murat Uysal, and has come under fire from opposition parties for mismanaging the economy.

Scaling Back

“Albayrak’s name is mentioned and the market freaks out that he is somehow coming back into government,” Timothy Ash, a strategist at BlueBay Asset Management, said on Twitter.

Foreign funds poured $4.8 billion dollars into local bonds and equity markets since Naci Agbal was appointed as central bank governor in November, chasing one of the highest yields in the developing world. Under his watch, the central bank has increased the one-week repo rate by 675 basis points to 17%.

“The central bank is taking steps to regain its credibility, but acting pro-actively would be more supportive for Turkish assets,” Julius Baer analyst Eirini Tsekeridou and strategist Mathieu Racheter wrote in a Tuesday note.

Meanwhile, Citigroup Inc. said it was scaling back its overweight position in the lira to marketweight, citing upcoming foreign-currency payments and a potential widening of the country’s current-account deficit.

©2021 Bloomberg L.P.

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