Turkish lira weakens again after brief strong rally

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Turkey’s lira weakened as much as 1 percent on Thursday, retreating a bit from a strong rally the day before when President Tayyip Erdogan pledged a new economic strategy, prompting traders to lock in bets of a sharp interest rate hike next week.

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The worst performer in emerging markets (EM) this year, the lira touched a record low on Friday. But after the shock weekend departures of the central bank chief and finance minister, it jumped some 7 percent this week to the front of the EM pack.

Erdogan sent it soaring again on Wednesday when he shifted to a more market-friendly tone and promised economic growth based on stability and international investment - a turnaround from blaming foreigners and high rates for Turkey’s woes.

Even “bitter” policies would be implemented, he said, which analysts took to mean he would back a big policy tightening when new Governor Naci Agbal heads a central bank meeting on November 19.

The comments, “emphasizing that he will be on the new team’s side in every step they take, tentatively suggests to us that he has given the green light for a rate hike,” Goldman Sachs analysts Murat Unur and Clemens Grafe wrote in a note.

The lira slipped to as far as 7.89 versus the dollar and was at 7.86 at 0729 GMT, off 0.8 percent. Five-year credit default swaps, a measure of risk, have plunged to their lowest since coronavirus turbulence hit in early March.

Goldman expects the central bank to hike its policy rate to 15 percent from 10.25 percent now and some other analysts expect more. The bank raised the rate 200 points in September
but held steady last month, setting off the latest lira selloff.

Erdogan has in the past blamed foreign investors for a more than halving of the currency’s value since early 2018. He has also repeatedly called for lower rates - and claims against monetary orthodoxy that high rates cause inflation - stoking worries over Turkey’s monetary independence.

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