Turkish lira surges as Erdogan invokes extraordinary measures

The Turkish lira surged late on Monday and early Tuesday morning after Turkish President Erdogan announced extraordinary measures to stem the weakness.

Prior to Erdogan’s announcement, USD/TRY had reached a record high around 18.36. After the measures were announced, the lira strengthened, with USD/TRY dropping as low as 11.09 early on Tuesday morning. At 08:40GMT, USD/TRY was trading around 13.50.

What did Erdogan announce?
The main measure that Erdogan announced was the introduction of a new programme that will make up for losses incurred by those holding lira deposits should the lira’s decline against other currencies exceed the interest rates available at banks.

“The drop is reportedly due to Erdogan effectively offering to floor TRY-deposits at zero percent returns against some other currency,” Danske Bank analysts said in an emailed note. “Details, if any, appear very sparse in international media and we are quite doubtful this is the end to the current lira story”

Nevertheless, the lira strengthened by over 20% against the USD on Monday after the announcement.

GBP/TRY showed similar price action with the cross breaching 24.00 before Erdogan’s announcement before dropping to around 15.65 on Tuesday morning, the lowest level since 24th November.

Why has the lira been so weak?
The Turkish lira has lost about half of its value against the USD since September. Erdogan has directed the central bank to cut the interest rate recently and they have obliged, lowering the one-week repo rate by five percentage points since September.

The central bank has attempted to stem the tide by intervening in FX markets five times during December. Reuters reported that according to bankers’ calculations the Turkish central bank has sold more than $6 billion from its foreign reserves in an attempt to prop up the currency.

What to look out for?
Looking ahead, the focus will be on details on how Erdogan’s measures will work and the level of inflation in Turkey.

Turkish CPI hit 21.3% in November and things are likely to get worse before they get better.

“Turkey will reveal an unavoidably jump in inflation to 25-30% levels in the next months, meanwhile the central bank will do everything to keep interest rates low,” Swissquote Senior Analyst Ipek Ozkardeskaya said. “Market’s tolerance for the low-rate policy won’t be infinite, and the wind could rapidly change direction.”