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Turkey’s President Recep Tayyip ErdoÄŸan has sacked the central bank governor – the third change in 21 months – after a significant rate hike. Unsurprisingly, USD/TRY spiked higher in the aftermath of the decision. The pair has pulled back somewhat since to around the 7.92 mark, but market conditions remain highly skittish and economists at TD Securities expect the lira to set new all-time lows.

Key quotes

“The CBRT is now on its fourth governor in two years. This comes after Turkish president Erdogan removed the previous incumbent, Naci Agbal, on Saturday after only nineteen weeks on the job. Agbal’s replacement is Sahap Kavcioglu. Kavcioglu is a former AKP lawmaker, professor of banking at the Marmara University in Istanbul. Unsurprisingly, he has advocated lower interest rates through his columns in the pro-government Yeni Åžafak newspaper.”

“We now expect the CBRT, the BDDK and state-owned lenders to attempt to build a firewall that can support the lira for the short-term.”

“The risk is that trade volumes drop as the lira becomes intractable from a local-market perspective. However, if the local TRY and rates market becomes dysfunctional like in the previous lira crisis, we may see cash rates push substantially higher, in the hundreds of percentage points.”

“We think the lira will remain on a weakening trajectory for now, despite the attempts to backstop its fall. New all-time lows are possible and look increasingly likely in the days ahead.”