USD/TRY back above 13.00, up 20% on the week as fears about Erdogan’s “new economic programme” persist

USD/TRY is on course to post a fifth successive day of gains during which time its has rallied from underneath the 11.00 mark to current levels just above 13.00. That marks a roughly 20% rally on the week and corresponds to an approximate 18.5% depreciation in the value of the lira versus the US dollar. The pace of USD/TRY’s rally has subsided somewhat this Friday, however, with the “only” trading higher on the day by about 0.6%, a tiny intra-day move in the context of recent USD/TRY volatility. The pair seemed to find resistance at its 21-day moving average which currently resides close to 13.50.

Renewed calls from Turkish President Recep Erdogan on Friday for Turks to have trust in his “new economic programme” has not had any notable intra-day impact on the price action. The President rallied against dollarisation/the use of other medium’s of exchange in the Turkish economy, saying "I want all my citizens to keep their savings in our own money, to run all their business with our own money, and I recommend this”. “Let's not forget this” he continued in a speech to a Turkish business group, “as long as we don't take our own money as a benchmark, we are doomed to sink. The Turkish Lira, our money, that is what we will go forward with. Not with this foreign currency, that foreign currency.”

Erdogan’s new economic programme batters lira

The implementation of Erdogan’s “new economic programme” has put the lira on course to post its worst annual return in more than two decades. The lira has lost more than 40% of its value versus the US dollar. Erdogan thinks high-interest rates as a cause of inflation (the opposite of classic economic orthodoxy) and has exerted pressure on the CBRT, which is supposed to be independent of the government, to cut interest rates despite high inflation. Indeed, even though Turkish inflation is likely to close in on 30% in December and some analysts think it could surpass 40% next year, the CBRT has been aggressively cutting interest rates in recent months. Rates have been lower by 500bps since September to 14.0%.

The massive gulf between interest rates and inflation in Turkey means real interest rates reside in deeply negative territory, which has spurred an ongoing flight from the lira, worsened as investors in Turkey fear Erdogan is going to push the nation into hyperinflation.

Lira deposit protection scheme adds to risks

USD/TRY surged as high as 18.0 earlier in the month, but then dropped back to near 10.0 after the Turkish government unveiled a raft of new anti-dollarisation policies including a pledge that the government would protect converted local deposits from losses via lira depreciation. Some analysts saw this as an alternative to rate hikes, hence supporting the currency at the time.

But analysts are clearly skeptical that the Turkish government’s new deposit protection scheme can provide lasting support to the beleaguered lira and reverse the recent dollarisation of the Turkish economy. Analysts at Societe Generale said that while the new assurance could provide some “backstop” for the currency, “market participants need to see tangible steps to address underlying problems in the economy”. In other words, aggressive rate hikes to bring the CBRT rate above the inflation rate and Erdogan permanently stepping back from his meddling in the central bank’s affairs.

That is not going to happen anytime soon, which is likely why the lira has been back under selling pressure this week. Some analysts think the government’s new pledge adds to downside lira risks given that rapid lira depreciation now exposes the government to massive liabilities where it has to reimburse investors for their lira-depreciation-related losses. With CBRT forex reserves sat at a two-decade low of just $8.63B, there is precious little the central bank can do to push back against a new wave of lira selling pressure.