Turkish delight as lira extends recovery

Has the tide turned?

One of the biggest movers in the FX markets this week has been the Turkish Lira. The currency has bounced back more than 10% against the US dollar after repeatedly hitting record lows. More gains could be on the way if investors truly believe that President Recep Tayyip Erdogan will stick to his pledge of swallowing “bitter-pill policies” if needed.

The lira hit a new all-time low after the country’s central bank kept policy unchanged instead of raising rates to dampen surging inflation. Erdogan has long been an advocate of low rates, but after the nation’s currency kept plunging to record lows, inflation rose to uncomfortable levels and the economy suffered, he finally seems to have succumbed to pressure to change tack. He replaced his son-in-law Berat Albayrak by Lutfi Elvan as the new Finance Minister and got rid of the former central bank governor and replaced him by Naci Agbal. Mr Agbal will hold his first Monetary Policy Committee meeting on November 19. The eyes of the world will be on him. He is widely expected to hike borrowing costs sharply. Erdogan has said that he will stand by the actions of the new finance minister and central bank governor “in every step they take.”

So, traders are piling into the lira and other Turkish assets amid speculation interest rates will rise sharply next week, which should hopefully dampen inflation and bring back credibility. Added to this, news of the Pfizer vaccine has lifted the mood towards risk assets, which has undoubtedly added to the buying pressure behind Turkish lira and other emerging market currencies.

With a double whammy of bearish news for the USD/TRY, or bullish news for TRY, the currency pair has broken many support levels, including the bullish trend line. Consequently, more losses could be on the way in the short-term outlook. But insofar as the slightly longer-term is concerned, investors will need to assess what action the new central bank governor and finance minister will take before deciding whether to commit to their trades.