Lira Traders Want to Know If Erdogan Policy Pivot Will Last

(Bloomberg) -- Are the days of lira weakness coming to an end?

Traders piled into the Turkish currency on Wednesday after President Recep Tayyip Erdogan pledged “bitter-pill policies” if needed, and threw his support behind the new central bank governor and economy czar, fueling speculation that the monetary authority will increase interest rates next week.

A gain of more than 4% pushed the lira toward levels last seen before policy makers disappointed investors in October by holding, rather than raising, borrowing costs.

But even as the currency bucked the weakness across emerging markets, investors said they still need more evidence that Erdogan’s apparent pivot to a more orthodox monetary stance is here to stay.

Here’s a roundup of comments on the outlook for the lira and monetary policy:

Edwin Gutierrez, head of emerging-market sovereign debt at Aberdeen Asset Management in London:

• “Erdogan does seem to have signed off on orthodoxy for now, which will last until the currency has stabilized”
• On next week’s central bank meeting, “the signaling will be important, i.e. that they plan to return to positive real rates”

Nigel Rendell, a senior analyst at Medley Global Advisors in London:

• “An apparent U-turn from the president -- or at least a public admission that rates will need to rise, hence the reference to a ‘bitter-pill.’ Can a leopard change its spots? There is certainly some skepticism”
• “Perhaps he’s realized there is no alternative to higher interest rates if he wants to put some kind of floor under the lira and protect companies with large FX debt”
• “This all builds up expectations for next week’s CBRT policy meeting. The bank has to raise rates by at least 300 basis points. Anything else would be a major let-down and would send the lira into a tailspin”

Cristian Maggio, head of emerging markets strategy at TD Securities in London:

• “The very fact that the President talks about central bank duties and priorities, setting an agenda for the CBRT, while showing he can change governor at will, proves the CBRT is not an independent institution as orthodox monetary policy would demand”
• In order to keep the lira’s momentum alive, the CBRT should deliver tightening on Nov. 19, with the repo rate to be raised by at least 575 bps to 16%
• If the market keeps pricing in expectations of large-scale tightening, the USD/TRY pair could drop to around 7.75 and then to 7.13. Disappointment would quickly see USD/TRY to the 9 handle for end-November

Phoenix Kalen, an emerging-market strategist at Societe Generale SA in London:

• The central bank will probably lift the one-week benchmark repo rate by 400 basis points to 14.25% on Nov. 19 and may even revert back to using the policy rate instead of the current daily reliance on the interest-rate corridor
• “If this period indeed marks the inflection point in Turkey’s narrative and the start of a strategic commitment to more orthodox, credible economic policy making, TRY may continue the strong performance shown this week as it recovers from deeply oversold levels”
• Recommends a short USD/TRY spot position, with a target of 6.92 and a stop at 8.31

Julian Rimmer, a trader at Investec Bank Plc in London:

• “I’m not buying it but I would love to be proven wrong. We have heard statements like this countless times in the past but when push comes to shove Erdogan still calls the shots”
• “Zebras don’t change their stripes and I don’t understand why, after a decade of overseeing the depreciation of the lira through economic mismanagement, the president would suddenly see the light. Monetary orthodoxy has always been sacrificed on the altar of political expediency and while he is at the helm I suspect it always will”
• “The market requires, nay demands, a conventional rate hike of at least 400-500 basis points at next week’s MPC”

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