The Turkish lira rebounded 1.5% on April 26 and recovered from near an all-time low as locals took advantage of recent weakness to sell dollars, but concerts lingered regarding U.S. relations as well as pending interest rate cuts. Turkish Lira is among the worst emerging markets performers in 2021, firmed to 8.3 versus the U.S. dollar. Earlier in the day lira fell to 8.485. As a result, it fell to the lowest level versus the dollar this year and it was close to its record of 8.58 reached in early November.
The Turkish lira dropped 3.5% over the last three trading days as it became clear that U.S. President Joe Biden would recognize the Armenian genocide. Turkey sharply criticized the decision made by Joe Biden and said it undermined trust and friendship.
Turkish assets are very sensitive to strains in relations with the U.S. given past fallout from U.S. sanctions and economic threats. For example, a spat with President Donald Trump triggered a lira crisis as well as a recession. President Recep Tayyip Erdogan was set to address the genocide issue later on April 26.
Turkish Lira and the central bank’s new governor
President Erdogan fired three central bank chiefs in two years and his decision eroded monetary credibility. Central Bank Governor Sahap Kavcioglu made an interesting comment on Friday. He plans to keep monetary policy in place for now. The current chief also noted that any rate hike would send a bad message to the real economy.
Before Monday’s gains, the Turkish lira fell during the last six trading days in a row. It declined as much as 15% in March after Erdogan dismissed Naci Agbal, a respected policy hawk. He replaced Agbal with Kavcioglu. President Erdogan as well as Kavcioglu does not support tight monetary policy. He supports the unorthodox view that causes inflation.
Analysts expect the country’s central bank to begin cutting interest rates around mid-year. Some analysts predict Kavcioglu could switch to a costly past policy of selling foreign currency reserves to support the Turkish lira.
The opposition pressed Erdogan to account for some $128 billion in sales in 2019 as well as 2020. Such decisions sharply depleted the foreign currency reserves. The current governor defended the sales in the face of what he called attacks that began with the 2018 crisis. The current governor seems quite happy with the amount of reserves. However, the system remains fragile against a situation such as bank run where households and companies need their FX deposits.
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