With the US presidential election seemingly wrapped up late on Friday evening, market participants were gearing up for a period of relative calm after a choppy start to the fourth quarter. However, early Saturday morning, the idea of a quiet week this week was thrown out of the window with the announcement that CBRT Governor Murat Uysal was relieved of his duties and replaced by the former head of the Presidential Strategy and Budget Office, Naci Agbal.
The news flow didn’t stop there, as Uysal’s exit was followed in close succession by the announcement of Finance Minister Berat Albayrak’s resignation. It is unclear what prompted the President’s son-in-law to quit his position in the government and whether President Erdogan will even accept his resignation, but rumours that Albayrak and Agbal don’t see eye-to-eye on macroeconomic policy are doing the rounds today.
However you read into it, the market has taken the news favourably today.
The lira enjoyed the biggest one-day jump in two years and is trading over 5.5% higher in today’s session, CDS pricing – insurance against Turkish government debt default – has also dropped, while the Borsa 100 index is 2.6% higher also. The move in the lira was prompted by the changing of the guard in key positions of power in Turkey, with many expecting a return to orthodox policy – namely higher one-week repo rates – hereon in. During his stint as CBRT Governor, Murat Uysal attempted to avoid using interest rate hikes as the countercyclical tool due to how politically sensitive they are. Instead, the treasure chest of FX reserves was emptied, liquidity conditions were dried up and back-door tightening of monetary policy began as credit stimulus was wound down. While this had a dampening effect on the recent rise in domestic inflation, it did little to soothe currency markets as the lira traded up towards the 9.00 level. With the inflationary channel steepening because of the lira’s sell-off, ultimately Uysal’s gamble didn’t pay off. While markets may be expecting a return to the 2018 playbook from the CBRT under Governor Agbal, that is clear and well signalled monetary policy hikes and no continuation in driving bank lending domestically to higher-yielding windows, we note that many of the institutional limits remain in place. This means while markets are beginning to price the idea of higher repo rates in Turkey, evident in how the currency has rallied so substantially in today’s session, any interest rate hikes are likely to be the bare minimum required to reset the inflationary channel. Governor Agbal will also have to contend with the same dynamic that led to the dismissal of Murat Cetinkaya back in 2018. That is, cutting interest rates quickly enough to appease political pressure and maintain the deflationary momentum.
While the rally in the lira today is significant and meaningful, the lira still remains over 30% weaker year-to-date with inflation also high and rising at 11.9% in October.
With Turkey’s FX reserves non-existent after the tank was emptied earlier this year, the new appointments may not be enough to move the needle for the Turkish lira and reshape the current TRY trend beyond the initial short-term rally. Markets now wait for the next central bank meeting on November 19 to see what cards the central bank will put on the table and the direction the changing in the guard will take over the medium-term.
Turkish lira rallies on the back of changing of the guard, but is the market just setting itself up for disappointment?
Turkish rates this year have been driven higher by back door tightening, more traditional rate hikes imminent?
Author: Simon Harvey, FX Market Analyst