TRY Craters on CBRT Shock
The USD keeps moving higher against the Turkish Lira since President Erdogan fired the country’s central bank governor, Murat Cetinkaya, earlier in the week.
Cetinkaya had been governor of the CBRT since April 2016. However, Erdogan has long been opposed to the displaced head of the CBRT due to his program of raising interest rates.
Erdogan has been very vocal in both his support for lower interest rates in Turkey as well as his opposition to Cetinkaya. He even went as far as to describe interest rates as the “mother and father of all evil” and had long called for the CBRT to lower rates.
CBRT Raised Rates Against President’s Wishes
Despite Erdogan’s opposition, the CBRT had been pressing ahead with its policy of monetary policy tightening. The bank last lifted rates in September 2018 with a huge hike from 17% to 24%. The bank stated that a:
“Tight stance in monetary policy will be maintained decisively until inflation outlook displays a significant improvement.”
The hike brought the Turkish Lira back from all-time lows against the USD. However, it drew sharp criticism from Erdogan.
Turkey Still Caught In Economic Slump
Turkey has been experiencing deep economic problems over the last few years. Inflation skyrocketed higher into double figures in the wake of a nosediving currency which plummeted 30% against the dollar.
Inflation hit 15-year highs of over 25% in October 2018. And it’s still in the double figures currently at 15.72% in June. The country has also been riddled with massive amounts of public debt.
Turkey also suffered yet another credit downgrade last month from Moody’s. And the IMF forecast a 2.5% shrinkage in the economy over the year.
CBRT Independence In Question
The president ousted the head of the country’s central bank, which is supposed to be independent of political bias. Therefore, needless to say, there are now strong concerns over its independence.
The new governor, Murat Uysal, is among the more dovish of the CBRT’s policymakers. Therefore, many are now questioning whether he has simply been given the role under orders to cut rates.
Echoes Of Trump
The issue is particularly topical given the similarities in Trump’s criticism of Fed chairman Powell over the last year.
Trump has broken from the tradition dictating that presidents do not comment on the actions of the Fed. He has been highly and publicly critical of Powell and his policy of gradual normalization.
This is to the extent where many have questioned whether the president is actively trying to skew Fed policy.
New CBRT Governor Issues First Statement
In his first statement as governor of the CBRT, Uysal was keen to stress that the bank will continue to operate with independence.
He asserted that the bank would maintain its focus on achieving its top priority of price stability. However, the market is now strongly anticipating a rate cut, reflected in the sharp drop in TRY.
Turkey Facing Potential US Sanctions
The TRY could come under even further pressure this week as Turkey is due to receive S-400 missile systems, acquired in a deal with Russia.
The US had warned Turkey against such a deal and has threatened to sanction the country if it makes such a move.
Given the timing of the Cetinkaya’s dismissal, there is speculation around whether Erdogan ordered the move to allow for rate cuts to help buffer against any US sanctions on the country.
USDTRY traded at 5.7549 last, with prices having regained some of the earlier losses seen following the spike up on Monday. For now, USDTRY remains under the bearish trend line from year to date highs, though above only retested it during London session. If we break above the bearish trend line, the next level to watch will be the 5.9339 level which was the June high.