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Turkish lira plunges after Erdogan sacks hawkish cenbank chief

Reported by ritcha | March 22nd, 2021 @ 10:04 AM

Turkey's lira plunged 15% to near its all-time low after markets opened following President Tayyip Erdogan's shock weekend decision to oust a hawkish central bank governor and install a like-minded critic of high interest rates.

The appointment of Sahap Kavcioglu, a former banker and ruling party lawmaker, in the early hours on Saturday marked the third time since mid-2019 that Erdogan has abruptly fired a central bank chief.

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Kavcioglu had sought to ease concerns over a sharp selloff in Turkish assets and a pivot from rate hikes to cuts in a 90-minute call on Sunday, in which he told bank CEOs he planned no immediate policy change, a source told Reuters.

The currency tumbled to as weak as 8.4850 versus the dollar, from 7.2185 on Friday, back to levels touched in early November when it reached an intraday record of 8.58. It last changed hands at 8.0749.
"The lira is being smashed by investors fearing that the custodian of its value does not share their hopes for a stable currency underpinned by positive real interest rates," said Westpac senior currency strategist Sean Callow, adding that the lira may not yet have found a bottom.

"The real test will be when the volume comes in in Europe," he said. Goldman Sachs and others had expected a sharp dive in the lira and Turkish assets given the new governor's dovish and even unorthodox views, and what was seen as the latest damage to the bank's credibility amid years of policy interference that has dogged the major emerging market economy.

The weekend overhaul could soon reverse the hawkish steps taken by predecessor Naci Agbal, analysts said, and nudge Turkey toward a balance of payments crisis given its depleted buffer of FX reserves.
One possible scenario would see the lira swing as much as 15% in both directions in Monday's European session as "TRY sets off on a roller-coaster ride driven by capital flight, central bank interventions and bargain hunters," SEB Research wrote in a client note.

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