The Potentially Toxic Collapse Of The Turkish Lira
FxPro Financial Services Ltd | Mar 22, 2021 06:21AM ET
The Turkish lira started the week with a 16% plunge due to the Turkish president's sacking of the central bank governor.
At 8.4 per dollar and 10 per euro, the lira was near historic lows. Since last November, the lira's rise was mainly attributed to the central bank governor's hawkish policies.
Last week he raised the key rate by two percentage points to 19%, apparently the last straw for Erdogan, which is not the first time he has sacked a hawkish central bank governor.
With the arrival of liquidity at the start of trading in Europe, the USDTRY rate rolled back to 7.80 and EURTRY to 9.4. However, it is likely that the lira's pressure will continue and that it will soon hit all-time lows.
The collapse of the lira is the market's logical reaction to the attack on the central bank's independence. The replacement of the Turkish central bank governor by a clear dove has raised chances for a rate cut. The central bank and finance ministry could bring back capital controls when foreign exchange reserves are depleted.
This is worrying news for emerging market currencies. In previous years, we repeatedly saw that sustained pressure on the Turkish lira becomes toxic very quickly, escalating into pressure on European assets and currencies with links to Turkish markets.
In particular, restrictions on capital flows in Turkey could push the euro further downwards.
Generally speaking, government intervention in central bank policy promises to increase significantly in the coming months and years, becoming a global trend.
Europe, the US and Japan need low-interest rates to keep debt under control.
Get The News You Want
Developing countries need to make a difficult choice between the attractiveness of low rates for domestic business and the capital outflow that this will cause.
Either way, stuck in this debate, investors are showing nervousness, reluctant to cut their share of risk assets despite negative real bond yields.
The FxPro Analyst Team
Trading in financial instruments and/or cryptocurrencies involves high risks including the risk of losing some, or all, of your investment amount, and may not be suitable for all investors. Prices of cryptocurrencies are extremely volatile and may be affected by external factors such as financial, regulatory or political events. Trading on margin increases the financial risks.
Before deciding to trade in financial instrument or cryptocurrencies you should be fully informed of the risks and costs associated with trading the financial markets, carefully consider your investment objectives, level of experience, and risk appetite, and seek professional advice where needed.
Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. The data and prices on the website are not necessarily provided by any market or exchange, but may be provided by market makers, and so prices may not be accurate and may differ from the actual price at any given market, meaning prices are indicative and not appropriate for trading purposes. Fusion Media and any provider of the data contained in this website will not accept liability for any loss or damage as a result of your trading, or your reliance on the information contained within this website.
It is prohibited to use, store, reproduce, display, modify, transmit or distribute the data contained in this website without the explicit prior written permission of Fusion Media and/or the data provider. All intellectual property rights are reserved by the providers and/or the exchange providing the data contained in this website.
Fusion Media may be compensated by the advertisers that appear on the website, based on your interaction with the advertisements or advertisers.