The Turkish lira had its worst day in years as investors reacted to the latest decision by Recep Tayyip Erdogan to fire the country’s central bank governor on Friday. The USD/TRY, GBP/TRY, and EUR/TRY all gained by more than 15% in early trading.
Naci Ugbal is gone
In 2020, while most emerging market currencies were falling against the US dollar, the Turkish lira was an outlier. The currency declined to a record low against its major peers, including the euro, sterling, and the US dollar.
This happened as the then Central Bank governor decided to avoid raising interest rates even as consumer inflation rose. Instead, the then governor decided to use backroom maneuvers to stabilize the currency.
In November last year, the country’s president decided to hire a new governor to help the country deal with an almost worthless currency. He chose Naci Agbal, a respected economist who went to work right away.
Between the date of his appointment and Friday last week, the Turkish lira had gained by almost 20% against the US dollar. This performance was mostly because of his strict monetary policy, which pushed him to hike rates by more than 800 basis points. Last week, he surprised the market when he made a bigger rate hike to 19%. Analysts were expecting a modest hike to 18%.
The recent Turkish Central Bank interest rate hike was necessary since the country is seeing substantial inflation. The most recent data revealed that the country’s inflation surged to 15.6% in February. And the trend will continue.
Furthermore, the price of crude oil has already risen from less than $15 a barrel last year to more than $60. This, in turn, will lead to higher costs, which will then flow to other items.
Enter Sahap Kavcioglu
In an announcement last week, the Turkish president Erdogan fired Agbal and replaced him with Sahap Kavcioglu, a little-known professor and columnist. The reshuffle, which came after markets closed, was mostly because of last week’s rate hikes.
In Sahap, Erdogan has someone who will likely undo the actions of the previous governor. For one, the two believe in an unorthodox monetary policy theory that says that high-interest rates lead to high inflation. Indeed, the opposite is true since low-interest rates incentivize people and companies to spend money.
To be clear, it is still unclear whether Sahap will cut interest rates. Still, the USD/TRY rose because of losing confidence in the independence of the country’s Central Bank. Indeed, Turkey is one of the few countries where the president can appoint and fire a governor without consultation.
The advantages of a weak Turkish lira outweigh the disadvantages. The benefits are that the country’s exporters will benefit more from a weak local currency since their goods will be cheaper to their customers. In total, Turkey exports goods worth more than $187 billion every year. However, the disadvantage is that Turkey imports goods worth more than $196 billion each year. Also, a weak Turkish lira will affect investor confidence in the country and limit foreign direct investments.
USD/TRY technical outlook
The two-hour chart shows that the USD/TRY pair rose to a multi-month high of 8.4860 when the market opened on Monday. This price was above the important resistance level at 7.78. Its volatility, as measured by the Average True Range (ATR) and the Bollinger Bands, also increased. While the price has retreated, the overall outlook is bullish because of the ongoing crisis in Turkey.
