Turkey’s lira has had a bad week, hitting fresh all-time lows versus the U.S. dollar as relations between Washington and Ankara soured. But it could get worse on Friday, when Turkish inflation data is due, said Win Thin, global head of emerging market currency strategy, at Brown Brothers Harriman.
The lira USDTRY, +1.5111% hit an all-time low against the U.S. dollar on Thursday, after the greenback traded above 5 lira for the first time on record on Wednesday. One dollar last bought 5.0686. On the week, the lira is looking at a loss of more than 4%. In the year to date, it is down 33.6%, according to FactSet.
Worsening U.S.-Turkish relations were in focus as Washington sanctioned Turkey’s justice and interior ministers over the country’s continued detention of Andrew Brunson, a U.S. pastor. Turkey has dismissed U.S. calls for his release as unacceptable and an assault on the country’s justice system.
Thin said the July consumer price inflation report due Friday could whack the lira once more. Turkey has been struggling with double-digit inflation for many months. The indicator last stood at 15.4% in June, up from 12.1% in May.
“July CPI will be reported tomorrow and is expected to accelerate to 16.3% year-on-year,” the strategist said. “If so, it would move further above the 3% to 7% target range.”
The Central Bank of the Republic of Turkey has been trying to stem the roaring inflation and ailing currency by raising interest rates. But President Recep Tayyip Erodgan is an outspoken critic of that strategy.
Erdogan was re-elected in a snap election in June, but thanks to a referendum passed in 2017, he has more power this time around, such as appointing ministers without congressional approval. Shortly after his inauguration, he appointed his son-in-law Berat Albayrak as treasury and finance minister, which was seen as a negative signal by the market.
Market participants worry about the CBRT’s independence and whether it has done too little too late to help the Turkish economy avoid crisis.
“If the central bank remains behind the curve, we could easily see inflation approach 20% in the coming months,” said Thin. “Officials pledged to hike rates further if inflation rises and yet the CBRT delivered a dovish surprise last month.”
The CBRT’s benchmark rate is its one-week repo rate that currently stands at 17.75%. The next scheduled CBRT meeting is on Sept. 13, “but an intra-meeting hike will be needed if market sentiment goes further south,” Thin argued.
“We believe the central bank should be given free rein to hike rates aggressively, along the lines of what Argentina did,” Thin said, referring to the aggressive interest rate increases that the South American nation engaged in earlier this quarter. But in Turkey’s case, “hiking 100 basis points here and there just won’t cut it any more as the bank needs to make a much stronger statement. By waiting too long, the bank should now hike rates to at least 25%.”
Making matters worse, emerging economies have been struggling with a stronger dollar across the board. But the likes of Turkey and Argentina are highly reliant on foreign — often dollar-denominated — funding, thus when their currencies sell off, it becomes more expensive to service debt.
While all of this could be seen as a red flag, Turkey’s lira remains one of the highest-yielding emerging market currencies out there, making it attractive to investors willing to take the risk.
Want news about Europe delivered to your inbox? Subscribe to MarketWatch’s free Europe Daily newsletter. Sign up here.