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The Turkish finance minister resigned shortly after President Recep Tayyip Erdoğan fired the governor of the central bank on Saturday. The move prepares for large scale tightening, possibly even this coming week, in the opinion of Cristian Maggio, Head of Emerging Markets Strategy at TD Securities. In the absence of decisive moves from the CBRT, USD/TRY is likely to break above 9.00 before end-November.

Key quotes

“In a dramatic and unexpected move, Turkey’s President Erdogan has removed on Saturday night CBRT Governor Murat Uysal and replaced him with former Finance Minister Naci Agbal. The move, that is speculated to be the result of Uysal’s failure to rein in lira weakness, mirrors a similar decision from July 2019, when President Erdogan – frustrated by the CBRT’s reluctance to cut interest rates – removed former governor Murat Cetinkaya. Uysal is now the second governor to receive the boot and only 16 months into his mandate.”

“Our major concern is that the replacement of Uysal brings in just a different executor, who remains without true powers and independence that a central banker needs. The very likely win of Joe Biden in the US elections creates the conditions for a perfect storm in Turkey. The TRY and RUB are the currencies that have much to lose from a Biden presidency, as the new US administration will be less keen to accommodate Turkey’s political extravaganza and more prone to use the sanctioning tool with some adversarial countries if need be.”

“Given the current and prospective situation, we think that the CBRT will need to hike very soon, likely in an emergency meeting next week. We expect to see the WACF increase by 400-500bps to 19-20% on the back of a Repo Rate hike of around 600-700bps.”

“At the current pace, the USD/TRY pair could break above 9 before the end of the month. If the pace of depreciation is tamed lower, but not halted, we can see the pair still breaking above 9 by March 2021. And more dreadfully, the 10 handle also looks closer than one may think, possibly on track for the second half of 2021. All this unless the CBRT intervenes immediately, with large scale tightening, and avoiding unorthodox moves and tricks as much as possible. But a stable currency path will also require different political posturing. Foreign and domestic policies must change if market confidence is to be regained.”