Get 40% Off
🤯 This Tech Portfolio is up 29% YTD! Join Now to Get April’s Top PicksGet The Picks – Just 99 USD

Lira Traders Say ‘We’ve Been Here Before’ in Turkey Rates Replay

Published 2021-06-02, 07:11 a/m
Updated 2021-06-02, 07:11 a/m
© Reuters

© Reuters

(Bloomberg) --

Turkish President Recep Tayyip Erdogan’s demand for interest-rate cuts sent a brief shockwave through the lira, with the currency hitting a new all-time low.

But among traders and analysts, the reaction was: we’ve all seen this before. After Erdogan fired his previous central bank governor in March, it was only a matter of time before he started bearing down on a path to lower rates.

“The Turkish story is well known and has been ongoing for a while now, so I get the sense that investors would not have been caught off-guard,” said Todd Schubert, head of fixed-income research at Bank of Singapore Ltd. “There is little risk of heavy foreign fund outflows.”

In an interview with a state broadcaster late Tuesday, Erdogan said it’s “imperative” that the central bank lower interest rates, giving a vague reference to summer months as a target date.

The lira weakened as much as 3% after the move, and then stabilized, trading 1% lower at 8.63 per U.S. dollar on Wednesday. The currency has already been battered by bets that Turkey would ease policy, plunging 14% against the dollar this year, the biggest drop among emerging-market currencies.

Data from the options market also showed signs of calm. The dollar-lira’s one-month implied volatility held near the lowest level since February. Stock moves were muted as well, with the BIST 100 Index sliding just 0.3%.

The reaction was subdued because it was so well expected, said Henrik Gullberg, a London-based macro strategist at Coex Partners. “This is what markets have been waiting for,” he added.

Investors interpreted Erdogan’s decision in March to dismiss his market-friendly central bank governor as evidence of his determination to take control of monetary policy and carry out his unorthodox plan of lowering rates in the face of sky-high inflation.

However, the weak lira and faster inflation make the job even harder for Turkey’s new central bank chief, Governor Sahap Kavcioglu. It would take an extreme depreciation in the currency, likely around a 30% decline based on historical trends, for Erdogan to change his mind over rate cuts, Gullberg predicted.

“We have seen this move several times before,” said Emre Akcakmak, a portfolio adviser at East Capital in Dubai. “Investors do not want to see yet another episode of a premature rate cut, especially now when inflation is stubbornly high.”

©2021 Bloomberg L.P.

 

Latest comments

Risk Disclosure: Trading in financial instruments and/or cryptocurrencies involves high risks including the risk of losing some, or all, of your investment amount, and may not be suitable for all investors. Prices of cryptocurrencies are extremely volatile and may be affected by external factors such as financial, regulatory or political events. Trading on margin increases the financial risks.
Before deciding to trade in financial instrument or cryptocurrencies you should be fully informed of the risks and costs associated with trading the financial markets, carefully consider your investment objectives, level of experience, and risk appetite, and seek professional advice where needed.
Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. The data and prices on the website are not necessarily provided by any market or exchange, but may be provided by market makers, and so prices may not be accurate and may differ from the actual price at any given market, meaning prices are indicative and not appropriate for trading purposes. Fusion Media and any provider of the data contained in this website will not accept liability for any loss or damage as a result of your trading, or your reliance on the information contained within this website.
It is prohibited to use, store, reproduce, display, modify, transmit or distribute the data contained in this website without the explicit prior written permission of Fusion Media and/or the data provider. All intellectual property rights are reserved by the providers and/or the exchange providing the data contained in this website.
Fusion Media may be compensated by the advertisers that appear on the website, based on your interaction with the advertisements or advertisers.
© 2007-2024 - Fusion Media Limited. All Rights Reserved.