The remarkable Turkish lira plunge is intensifying as investors lose confidence in the country’s central bank. The USD/TRY exchange rate jumped to a record high of 30.55 as it now enters a dark phase after plunging by over 63% from its 2023 lows.
Turkish lira enters a dark phaseThe strength of a country’s currency is determined by several factors, including trade and economic strength. Perhaps, the most important aspect is the faith of a country’s central bank. This explains why most countries have insulated their central banks from political maneuvers.
It also explains why the Turkish lira has been one of the worst-performing currencies in the world. It has crashed by over 1,000% in the past two decades mostly because President Erdogan has eroded the confidence of the CBRT.
This trend continued last Friday when Hafize Gaye Erkan resigned as the CBRT governor. While she was not fired by Erdogan, she attributed her decision to a smear campaign against her, partly by Erdogan’s loyalists.
In her tenure, Hafize has worked to strengthen the Turkish lira by delivering several giant rate hikes. She hiked them from 8.5% mid-last year to over 45% in a bid to make the lira more attractive. While these hikes were welcome, they did nothing to boost the local currency. Instead, it has fallen by over 20% during her tenure.
Analysts believe that Erdogan fired her because of his dislike for rate hikes. He belongs to a school of thought that argues that high-interest rates cause inflation and not vice versa. He has also fired several CBRT officials for maintaining a hawkish stance.
The Turkish lira now faces the risk that the new central bank governor will slash interest rates to please Erdogan. This will be a negative thing because it will increase the gap between interest rates and inflation. The most recent data shows that Turkish inflation stands at over 65% while the official rate sits at 45%.
This means that the interest rate earned by depositors is much lower than inflation, which analysts believe is higher than the official figures. As a result, many people and businesses have turned to the US dollar and other foreign currencies.
USD/TRY outlook
The new changes at the CBRT leave the Turkish lira in limbo since it is unclear whether the new governor will continue with the hawkish tone. What is clear is that the change of leadership at the central bank leaves the Turkish lira in limbo.
As shown above, the pair has remained in a strong uptrend in the past few months. In this period, it has continued rising and currently sits above all moving averages, pointing to the strength of bulls. Therefore, the pair will likely continue rising in the coming weeks as buyers target the key resistance at 31.
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