Pound-to-Lira Rate Surges as Turkish Lira "Far from a Lost Cause" says One Analyst

- TRY jumps on major Turkish personnel changes
- Rally signals investor hope for return to orthodoxy
- TD Securities warn new CBRT governor faces impossible task
- Biden win to pose headwinds for TRY and RUB

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• GBP/TRY spot rate at time of publication: 10.60
• Bank transfer rates (indicative guide): 8.00-8.50
• Transfer specialist rates (indicative guide): 9.0540
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The Pound-to-Lira exchange rate slumped an eye-watering 5% on Monday as markets grasped news of significant personnel changes in the upper echelons of Turkish finance, moves that have apparently been welcomed by markets.

The Turkish Lira rallied in relief to news that Turkish President Recep Tayyip Erdogan’s son-in-law Berat Albayrak had resigned as Turkey’s finance minister on Sunday, a move that came a day after the removal of central bank Governor Murat Uysal.

The Turkish Lira surged by its greatest margin since March 2019 amidst investor hopes that the removal of Albayrak and Uysal signalled the government had received a clear message on the market's dislike for where fiscal and monetary policy were headed.

The rally by the Lira suggests markets are hopeful that a more traditional approach to finance will be readopted by Turkish authorities.

The Pound-to-Lira exchange rate fell by 5.0% to reach 10.54 but is still 33% up for 2020. The Euro-to-Lira exchange rate is down 5.0% at 9.55 but is still up 42% for 2020, the Dollar-to-Lira exchange rate is down 4.60% but is up 35.0% in 2020.

Above: GBP/TRY daily chart showing the huge rally of 2020.

According to one analyst we follow, the rally by the Lira should serve as a reminder to investors the country still poses some fundamental strengths that will likely limit the downside in the currency.

"Turkey's exports are a huge success story. Prior to COVID-19, export volumes rose far above other EMs (lhs, red), so Turkey is hugely competitive and Lira is far from a lost cause," says Robin Brooks, Chief Economist at the Institute of International Fiannce.

"Policy needs to focus on reducing import demand (rhs, red), which right now means slowing credit," says Brooks.

Following the shake-up, analysts at investment bank TD Securities say a large scale tightening of monetary policy is now possible, with interest rate rises potentially coming as soon as this week.

When a central bank 'tightens' policy it can do so by raising interest rates. This can make the cost of lending more expensive and act as a headwind for the economy, but it does crucially also increase the return on investments made in bonds. Therefore, interest rate rises in Turkey might be seen as offering international investors an improved return on capital, thereby increasing inflows of foreign currency and increasing the value of the Lira.

TD Securities expect to see the central bank hike the basic interest rate by around 600-700bps.

"The lira's dreadful performance is there to prove that policymaking in Turkey has failed on multiple levels," says Cristian Maggio, Head of Emerging Markets Strategy at TD Securities.

Former Finance Minister Naci Agbal now takes control of the Central Bank of the Republic of Turkey (CBRT) and faces an uncomfortable task of both stimulating the economy and reining in Lira weakness.

"The governor is asked to succeed in a job of titanic proportions where others have systematically failed. The 'impossible trinity' of controlling inflation, interest rates and the currency, while operating with an open capital account that is bleeding foreign currency due to a large current account deficit is simply not achievable. Further attempts in this direction are only recipe for currency crisis after currency crisis," says Maggio.

"Our major concern is that the replacement of Uysal brings in just a different executor, who remains without true powers and independence that a central banker needs," adds Maggio.

TD Securities meanwhile say the election of Joe Biden to the White House last week poses further challenges for the central bank, given they expect Biden's administration to strike a harder tone with both Russia and Turkey than Trump adopted.

"The TRY and RUB are the currencies that have much to lose from a Biden presidency, as the new US administration will be less keen to accommodate on Turkey's political extravaganza and more prone to use the sanctioning tool with some adversarial countries if need be," says Maggio.

TD Securities says that without immediate intervention the Lira will likely break to fresh lows.

"USDTRY is set to break new-record highs soon. The 9 handle is not too far from spot as the currency crisis, left unchecked, will only accelerate. At the current pace, the pair could break above 9 before the end of the month. If the pace of depreciation is tamed lower, but not halted, we can see the pair still breaking above 9 by March 2021," says Maggio. "All this unless the CBRT intervenes immediately, with large scale tightening, and avoiding unorthodox moves and tricks as much as possible".