Slow Kill and New Negative Numbers By

© Reuters. – Tsunami waves have been sweeping since early October, sending the currency to an all-time low.

Hardly a day goes by when the Turkish lira slips from a bottom into a deeper chasm, as it seems that more awaits one of the emerging currencies that was once among the strongest.

The markets are awaiting the Turkish Central Bank’s decisions regarding interest rates next Thursday, after these recent dramatic changes regarding the dismissal of 3 members of the Central Bank.

11 undo

At the end of the fourth of October trading, it was the last session in which the lira was seen rising against the dollar, to record 11 consecutive sessions of decline.

The lira plunged from levels of 8.8521 pounds / dollars at the end of October trading to 9.2955 pounds / dollars during those moments of writing the report, which is the lowest ever.

While the lira came as one of the worst-performing emerging market currencies ever against since the beginning of the year, as it fell from levels of 7.4320 pounds / dollars, down 25%.

No independence, no credibility

“These frequent shifts of central bank decision-making committee members underscore the message that Turkey’s central bank is not independent and is under enormous political pressure,” said Silva Demiralp, director of the Koç University Economic Research Forum and a former economist at the US Federal Reserve.

She added that the lack of credibility worries the markets because achieving the central bank’s inflation target of five percent will likely be more difficult, and also because any increase in the interest rate in the future will be less effective.

Two of the three dismissed MPs members were seen as opposing a 100 basis point rate cut to 18% last month, and their dismissals were seen as a prelude to further monetary policy easing next week at the earliest.

Analysts saw the move as further evidence of political interference by Erdogan, who has previously described himself as an enemy of interest rates and often urges monetary stimulus.

Underestimating, indifference

“They left either by choice or because the bank wanted to,” the governor of the Central Bank of Turkey said last Friday, commenting on Erdogan’s dismissal of three members of the central bank.

After Erdogan fired three members of the committee, Central Bank Governor Şehab Kavcioglu told reporters that some were making wrong assumptions about the dismissal of the committee members, and that there was no problem with the central bank.

And he added, in response to a question about whether the procedure was a decision of the president or the governor, “Part of the matter was just the choice of our friends, and part of it was our choice, talking about it as if there was a problem that harms the institution, the central bank.”

“These friends have been doing their job here for years and people should understand it better before making any criticisms,” he said, adding that the commission would make its decisions based on the data.

Analysts said that the two new members appointed to the committee do not have much experience in monetary policy, and will likely support lower interest rates in upcoming meetings.

War looming

And the lira crisis increases concerns about a renewed conflict on the Syrian border, following clear statements about Ankara’s intention to take military action.

Two Turkish officials said that their country is preparing for the possibility of launching new military action against a US-backed Kurdish group in northern Syria if related talks with the United States and Russia fail.

President Recep Tayyip Erdogan said this week that Ankara was intent on eliminating threats emanating from northern Syria, describing an attack by the Kurdish People’s Protection Units (YPG) that killed two Turkish policemen as “the straw that broke the camel’s back.”

Turkish forces launched three incursions into Syrian territory in the past five years, and imposed their control over hundreds of kilometers along the border strip and penetrated about 30 kilometers deep into northern Syria.

The United States considers the YPG a key ally in the fight against Islamic State in northeastern Syria, and Russia has forces in the region to support Syrian President Bashar al-Assad.

Two Turkish officials said Erdogan would discuss the matter with US President Joe Biden during the G20 summit of the world’s major economies in Rome at the end of October.

American tensions

Ankara’s purchase of the Russian S-400 system caused US sanctions. In December 2020, Washington included the Turkish Defense Industries Corporation, its head, Ismail Demir, and three other of its employees on the sanctions list.

Since then, the United States has repeatedly warned Turkey against buying more Russian weapons, but Erdogan has indicated that Ankara is still intent on buying a second batch of the S-400 system from Russia, a move that could deepen the rift with Washington.

There is support in Congress to push the administration of President Joe Biden to put more pressure on Ankara, mainly due to the purchase of Russian weapons and its human rights record.

Ankara says it hopes relations with Washington will improve under President Biden’s administration.

what is next?

The MUFG Corporation of the Bank of Tokyo-Mitsubishi UFG believes that the Turkish lira will continue to decline to 9.55 Turkish liras per dollar within a year from now.

Societe Generale, Barclays, JP Morgan and Goldman Sachs (NYSE:) predicted further rate cuts in the coming months.

The Central Bank’s Monetary Policy Committee will hold its next meeting on October 21, and Kavcioglu said last week: “The interest rate cut was not a surprise and has little to do with selling the lira later.”

Last week, data showed that Turkey’s inflation rose slightly less than expected to 19.58% y/y in September, the highest level since March 2019, incurring further losses for real yields after the central bank cut the interest rate to 18%.

Annual inflation in Turkey had already risen to more than the interest rate of 19.25% in August before the cut, it had reached 18.95% in July and the official inflation target is 5%.

The Turkish Central decided to reduce the interest rate by 100 basis points on repurchases, “repo” for a week, to 18%, and 23 economists included in a survey all expected the Turkish Central Bank to keep the basic interest rate at 19% due to the rise in consumer prices.

prospect data

  • Government Budget Debt (September) Wednesday, October 20
  • Consumer Confidence Index (October) Thursday, October 21
  • Interest rate on the Turkish lira during the week (Repo) Thursday, October 21
  • Overnight borrowing rate Thursday, October 21

Update at 17:30 Riyadh time

The Turkish lira’s decline continues as the US dollar Turkish lira pair achieved a new negative top, recording 9.3352 lira/dollar.

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