“We know quite well what we’re doing with the current policy, why we’re doing it and the kind of risks it entails and what we’ll achieve at the end,” Turkey’s Recep Tayyip Erdogan said Monday in Ankara.
He was referring to monetary policy under CBT governor Sahap Kavcioglu, who last week delivered a third consecutive rate cut despite surging inflation, in line with Erdogan’s insistence that the cure for higher prices and a weakening currency is lower rates. Kavcioglu’s extraordinarily ill-advised move took real rates in Turkey to nearly -5%. The lira hit a fresh record low after the announcement, just as it did after the preceding two rate cuts.
Fast forward to Tuesday and the bottom fell out. The lira fell some 9%, “shattering all kinds of records,” as Bloomberg colloquially put it, in an eleventh day of losses (figure below).
That’s the worst losing streak in at least two decades. One of the officials Erdogan dismissed last month in a purge ahead of Kavcioglu’s second rate cut took to social media to call for an abandonment of what he called an “irrational experiment that has no chance of success.” Bluebay’s Tim Ash, who’s perpetually incredulous at Erdogan’s belligerence, described the situation as “insane.”
To be sure, Erdogan’s Monday remarks weren’t surprising. He alluded to both domestic and international conspiracies and spoke about interest rates as though they (rates) are sentient beings with a sense of purpose, amenable to being shamed into admitting a nefarious agenda. That’s all par for the course, but it feels different this time — like markets have finally had enough of it.
“We’re pleased to see that the central bank’s policy rate is being kept low,” he said, suggesting sundry conspirators are playing a “game” against Turkey using the exchange rate. There’s more than one way to fight inflation, he insisted. Turkey was compelled to take what he called a “fighting path” and will be victorious in the “economic war.” Interest rates are the “reason” and inflation is “the result.”
The lira’s Tuesday freefall spilled over into the dollar via JPY, underscoring lackluster pre-holiday liquidity but also the sheer size of the move. “If it’s true that the lira just rocked JPY, which then rocked the BBDXY and euro and pound hence, then that’s a pretty bold outcome via a currency pair that doesn’t show up anywhere near the top of most-liquid crosses,” Bloomberg’s Eddie van der Walt wrote, before conceding that “stranger things have happened.”
One-month implied soared to levels last seen in and around Turkey’s 2018 mini-crisis (figure below).
Traders now see a slide to ~13.68 per dollar in the near-term and nearly 15 over the medium-term. The vol term structure is inverted and it goes without saying that USDTRY calls are favored.
Obviously, Kavcioglu isn’t capable of turning things around. Even if he weren’t on the same page with Erdogan, it’s not clear what he could do short of a draconian emergency rate hike. Given Erdogan’s Monday remarks, such a move is out of the question. “We were either going to give up on investments, manufacturing, growth and jobs, or take on a historic challenge to meet our own priorities,” he declared, during the same set of remarks that sparked Tuesday’s panic.
Typically, CBT will resort to half measures in situations like these in an effort to avert a total calamity, but this latest bout of turmoil is considerably more acute. Erdogan usually has an ace up his sleeve. Now would be a good time to play it.
On Tuesday, as the lira collapsed, Bloomberg picked up on the irony noted here last week. The lira’s losing streak is the longest since 2001, the linked article (above) noted. Back then, “the country was locked in a spiral of hyperinflation and soaring debt that ultimately propelled Erdogan’s AK Party into power.” As TD put it, “history is now going in reverse.”
As long as Turkey never buys anything from the outside and does not try to sell bonds/FDI to foreign investors, they’re golden… 🙂