The Turkish lira surged the most since March 2019 on speculation higher interest rates could be coming after the weekend resignation of the country’s economy czar and the dismissal of the central bank chief.
The currency, the worst performer in emerging markets this year, gained as much as 4.1% against the dollar, pushing its relative strength index out of the oversold range for the first time since Oct. 26. The Istanbul stocks gauge headed for the biggest gain since August.
Speculation an interest-rate increase may be looming came after President Recep Tayyip Erdogan fired central bank Governor Murat Uysal over the weekend. That was followed on Sunday by the announcement from Finance Minister Berat Albayrak — Erdogan’s son-in-law — that he would resign. The Turkish currency has lost about 30% against the dollar in 2020, a decline that has accelerated since the central bank held back from raising the cost of borrowing at its October meeting.
“The changes in management signal that the lira’s depreciation was beyond tolerance limits,” said Onur Ilgen, Head of Treasury at MUFG Bank Turkey. “It appears that Ankara will take a stand to stop lira rout at all cost. Markets trust the new central bank governor, so there is a belief that monetary policy and communication will get better with him.”
The lira was trading 2.2% stronger against the U.S. dollar at 8.3251 as of 11:07 a.m. in Istanbul. The Borsa Istanbul 100 Index was up 2%, its sixth day of gains.
“Markets give the new policymakers the benefit of the doubt after a highly disappointing few years,” said Emre Akcakmak, a portfolio adviser at East Capital in Dubai. “However, time is limited and cosmetic changes will not be welcome.”
Uysal’s sudden replacement by former Finance Minister Naci Agbal is unlikely to stem the lira’s losses unless monetary policy takes a more hawkish turn. Inflation is in double digits, the country is running a current-account deficit and foreign reserves are being eroded.
Turkey is scheduled to hold its next rates meeting on Nov. 19. In the run up to that decision, “the current situation and expectations will be reviewed, developments will be closely monitored,” Agbal said in his first statement on Monday. “Necessary policy decisions will be made with the available data and final evaluations.”
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While hopeful for a shift to more orthodox policies, some analysts remained cautious.
“I fear the positive reaction will be short-lived,” said Ulrich Leuchtmann, head of currency strategy at Commerzbank AG. “I interpret Uysal’s ouster and especially his replacement as a stronger grip of the Turkish President on the central bank. That cannot end in a lira-positive way as long as he does not end this unconventional monetary policy experiment Turkey is running for 3 years now.”
Albayrak’s term was characterized by mostly-futile efforts to control the value of the currency without resorting to raising interest rates, in line with Erdogan’s widely discredited view that higher interest rates lead to higher inflation. Most economists think the opposite is true.
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Joe Biden’s victory in the U.S. presidential election is unlikely to do the lira any favors either. Traders have been concerned that U.S.-Turkish relations will cool under the new administration. The Turkish government faces possible U.S. sanctions over the purchase of a Russian missile system.