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The latest reshuffling at the CBRT accompanied by the resignation of Treasury and Finance Minister Albayrak have triggered a long-overdue correction following the parabolic move higher in USD/TRY. Piotr Matys, Senior Emerging Markets FX Strategist at Rabobank, believes it would be prudent to wait and see concrete steps before making strong conclusions whether new Governor Agbal, in close cooperation with the Erdogan administration, will be able to restore the shattered confidence in the lira.

Key quotes

“Two surprising and consequential announcements were made over the weekend in Turkey. On Saturday, President Erdogan abruptly dismissed CBRT Governor Uysal and replaced him with his close ally Agbal. This was followed by Treasury and Finance Minister Albayrak unexpectedly resigning on Sunday citing health reasons. It is difficult to dismiss the notion that it was no coincidence that Albayrak decided to leave the ministry after Agbal was put in charge of the central bank. This unusual set of events could mark a shift towards orthodox policies, which would provide the lira with a much-needed respite.”

“Agbal is President Erdogan’s ally who served as his finance minister before Albayrak. While he is close to President Erdogan, reportedly Agbal is not afraid to express a different opinion. If his appointment is a serious step to prevent the lira from a total meltdown, he should raise the policy rate by at least 500bps this month. While the CBRT is scheduled to meet on November 19, we are of the view that holding an emergency meeting in the coming days would deliver a very strong message to the market that the new governor is committed to supporting the lira and avoiding a full-scale crisis.”

“Even a substantial rate hike will not prove sufficient to put the lira on the path of a sustainable recovery if that is not accompanied by efforts to accelerate the pace of structural reforms. Ideally, Albayrak’s successor would have to be someone who is market-friendly. It would have to be a person who has sufficient credibility so investors have a much higher conviction that Turkey’s structural issues of persistently high inflation and wide current account deficit will be properly addressed.”

“As for the USD/TRY pair, we are modestly optimistic that an important short-term top is in place, although this depends on the scale of any rate hike and Albayrak’s successor. That said, there is a substantial difference between a correction and a sustainable recovery. Much higher interest rates and a strong commitment to structural reforms –ideally overseen by the IMF– are required to adopt a long-term bullish view on the lira. It is too early for that and we need to witness concrete steps first from the CBRT and the Erdogan administration.”