Turkish Lira Pares Drop as Central Bank Chief Vows Tight Stance

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The lira pared its seventh day of declines as Turkey’s new central bank governor Sahap Kavcioglu gave currency traders what they wanted to hear, delivering a promise of tight monetary policy.

Local markets are still reeling from Turkish President Recep Tayyip Erdogan’s shock firing of Kavcioglu’s market-friendly predecessor more than a week ago. Before the governor’s remarks on Tuesday, the lira fell almost 3% after the latest surprise appointment at the central bank.

Kavcioglu pledged a “tight monetary stance” and said Turkey will continue to keep its benchmark one-week repo rate above consumer inflation. Speaking at the monetary policy authority’s annual board meeting in Ankara, he vowed to use monetary tools effectively and “independently.”

Turkish Lira Pares Drop as Central Bank Chief Vows Tight Stance

The shock departure of Naci Agbal on March 20 sent Turkish markets into a nosedive that revived memories of the nation’s August 2018 currency crisis. The revamp continued on Tuesday, as Erdogan replaced deputy governor Murat Cetinkaya with former Morgan Stanley executive Mustafa Duman.

“Kavcioglu has made yet another attempt to reassure nervous investors that monetary policy will remain tight, providing the lira with some brief respite,” said Rabobank’s Piotr Matys. “But he will find it difficult to convince the market to give him the benefit of the doubt after yet another dramatic reshuffling at the central bank.”

The lira traded down 0.8% at 8.2688 per dollar as of 4 p.m. in Istanbul. The Borsa Istanbul 100 Index was 0.2% stronger, after declining as much as 1.5% earlier. The yield on 10-year government bonds rose 20 basis points to 19.18%

Lira weakness is likely continue, and the new governor’s true test will come at the central bank’s April 15 policy meeting, according to Per Hammarlund, chief emerging market strategist at SEB AB. Kavcioglu will need to continue his predecessor’s path of rate hikes in order to quell the market jitters, whether he wants to or not, he said.

“It wasn’t a discussion about how much real rate the Turkish central bank will offer that led to a selloff in lira assets,” said Evren Kirikoglu, an independent market strategist in Istanbul. “It was the fact that central bank chiefs can be replaced any minute. While the lira pared some of its losses after his remarks, it’s unlikely to last long.”

Ripples in the Rand

The currency rout has also upended bets on the lira-rand exchange rate --- a popular way to wager on the fortunes of two of the most volatile currencies in emerging markets.

While Agbal was at the helm of the central bank, Credit Suisse Group AG analysts had predicted the cross would rise as high as 2.20 in the first three months of the year. At the end of January they flagged the risk of a “shift back to lira-unfriendly policies on the part of the Turkish central bank.”

The pair was set for its lowest close on record on Tuesday.

©2021 Bloomberg L.P.

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