USD/TRY Tests 7.99 As Lira Selloff Continues

The Turkish lira is still sliding against its US peer on Tuesday, but the currency’s plunge has cooled down after Turkey’s central bank chief was axed after only four months on the job. Following the initial shock, investors — at home and abroad — are weighing the situation and deciding what is next. The continuing fallout suggests that foreign capital is fleeing Ankara.

For the first time in more than a decade, Turkey’s 10-year lira bonds skyrocketed 484 basis points on Monday. They climbed another 21 basis points on Tuesday. The main stock exchange index plunged an additional 7% on Tuesday, triggering the circuit breakers twice on the Borsa Istanbul after one hour of trading. The cost of borrowing the lira for one week spiked 2,067% as investors needed liquidity to unwind their long bets.
Outside investors have sent the message that they are unwilling to buy into Turkey until President Recep Tayyip Erdogan is no longer running the central bank. It is evident that he will continue to run the institution as long as he is president, choosing to install someone who is in line with his economic thinking.
Although Finance Minister Lutfi Elvan assured markets that the government was still pushing ahead with free-market reforms and a liberal exchange-rate, senior presidential adviser Yigit Bulut confirmed to the press that new central bank chief Sahap Kavcioglu agrees that “rates should be as low as economic realities allow.”
The former governor Naci Agbal ostensibly disagreed, and this gave investors confidence that Turkish monetary policy would tighten and inflation and prices would soon stabilize.
Maya Senussi, a senior economist at the consultancy Oxford Economics, told The London Guardian that the selloff in the lira, the stock market, and any other asset linked to Turkey would persist. This is how much traders had supported Agbal and oppose any changes to the central bank’s direction.

Not only does it likely herald a premature easing of policy in the short term, the [central bank] leadership has now been removed once too often, leaving the bank with no credibility.

Indeed, for two years, it was slashing interest rates and imbibing the nation’s foreign exchange reserves to prop up the lira. With forex reserves left bare, it is going to be challenging for policymakers to resuscitate the currency.
On the data front, it should be interesting to see how business and consumer confidence readings perform.
The USD/TRY currency pair rose 1.1% to 7.8893, from an opening of 7.8008, at 12:24 GMT on Tuesday. The EUR/TRY edged up 0.7% to 9.3774, from an opening of 9.3100.
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Original from: www.earnforex.com