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“The Turkish lira sustained heavy losses plunging more than 3% against the US dollar (at one stage it was trading 5% lower) and 2.2% versus the euro extending its year-to-date losses to 6.3% and 4.8% respectively,” Rabobank’s EM FX strategist Piotr Matys said.

Key quotes

“Within a few hours since the sell-off started the CBRT responded by suspending one-week repo auctions for an unspecified period due to “the developments in financial markets.” On previous occasions the central bank was relatively slow to implement measures that would slow down lira’s depreciation. This made it even more difficult to regain control when the slump accelerated.”

“The sharp squeeze in USD/TRY should be a major warning signal for the administration to make progress in implementing urgently required structural reforms without further delay after the municipal elections.”

“Comments from Treasury and Finance Minister Albayrak imply the pace of structural reforms will accelerate starting from April. That said, Turkey could be tempted to use a much easier path to shorten the period of a recession by announcing fiscal measures to stimulate growth. The central bank could be under pressure to ease the burden on the economy by lowering interest rates. A response from the administration will be critical and it could depend on the outcome of local elections as we will describe in details in our next report.”