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The Turkish lira staged the biggest rally in the FX market on Monday as it strengthened by over 5% against the US dollar. It was the biggest daily gain for the lira since 2018. However, the optimism over conventional policy shift is yet to be tested after President Recep Tayyip Erdoğan fired the governor of the central bank, Lee Hardman, Currency Analyst at MUFG Bank, briefs.

Key quotes

“The sharp turnaround for the lira has been driven by investor optimism that monetary policy could soon shift in a more orthodox direction. It follows the decision from President Erdogan to fire CBoT governor Murat Uysal. He has been replaced by former Finance Minister Naci Agbal who is seen as one of the few remaining names in government that still subscribes to mainstream economic thinking, and is well regarded among international investors. Finance Minister Berat Albayrak has also resigned following the decision to install Agbal as the new Governor. President Erdogan has now accepted his resignation and appointed former deputy prime minister and development minister Lutfi Elvan as his replacement.” 

“The appointment of new Governor Agbal has encouraged speculation that the CBoT will start to tighten policy significantly by raising their key policy rate to provide more support for the lira. The first true test of policymaking under new Governor Agbal is expected to be posed by the next scheduled CBoT meeting on 19 November although there is some risk that the CBoT could hold an emergency policy meeting in the interim.” 

“If the CBoT decisively raises its key policy rate, it could prove to be an important turning point for the lira. It would increase our confidence that the worst point for the lira is over. Turkey’s current account deficit has actually widened following the COVID-19 shock. Over the last six months to the end of August, it has totalled around $23 billion. It leaves the lira vulnerable to renewed weakness if the CBoT disappoints.”