Ankara: Turkey’s lira drew support from Recep Tayyip Erdogan’s victory in Sunday’s election, yet the bounce probably won’t last long as concerns about the independence of the nation’s central bank and policy direction prevail, according to investors and analysts.
Turkey’s currency strengthened as much as 3.1 per cent, the most since 2015 on a closing basis, bucking the slump in emerging-markets as mounting trade tensions between the US and China weighed on sentiment.
“Despite the positive reaction in the lira, we are cautious and maintain our view that its trajectory will depend on how the macroeconomic policies develop post these elections, including the question about the central bank’s independence,” Sue Trinh, the head of Asia foreign exchange strategy at Royal Bank of Canada in Hong Kong, wrote in a report.
Capital fled this quarter as Erdogan fought with his own central bank, insisting against economic orthodoxy that interest rates need to be lowered, despite double-digit inflation. While the gain on Monday trimmed the lira’s loss this year to 18 per cent, it’s the worst performer among developing peers after Argentina’s peso.
Still, the cost to hedge against fluctuations in the lira over a one-week period fell by the most since at least 2004, and options traders, who were more bearish on the lira than any other emerging-market currency last week, are now more pessimistic on South Africa’s rand and Russia’s rouble, according to one-month risk reversals.
