Turkish Lira Under Fire after Erdogan Tells FX Market to Go Take a Hike

• USD/TRY scales 13.50, GBP/TRY rises through 18.00
• After Erdogan says “no going back” on interest rates 
• Looking to keep “pushing back the hot money policy”
• Says “this is not the ideal one for us” in TV address
• Rejecting “usury” & “manipulative pressure” on TRY
• TRY nearing 40% undervaluation on HSBC estimates

Above: File image of President Erdogan. Image © G20 Argentina.

The Turkish Lira tumbled to new all-time lows to open the mid-week session following a television interview in which President Recep Tayyip Erdogan effectively told financial markets to go and take a hike of their own, before hinting strongly that further interest rate cuts may be on the way.

Turkish Lira losses snowballed overnight and into Wednesday’s European session when USD/TRY topped 13.50 for the first time and the Pound-to-Lira exchange rate traded briefly above 18.00, taking 2021’s gains to an eye watering 81.9% and 79.9% respectively.

Losses swamped the Lira despite a robust recovery for Asian financial markets and came in the wake of a lengthy as well as wide ranging address from President Recep Tayyip Erdogan that was televised by state broadcaster TRT News late on Tuesday.

“With the new economic model, we are pushing back the hot money policy that will give high interest. We will support new investments, production and exports with low interest rates," President Erdogan told his interviewers at one point.

"In order to reduce the rising [USD/TRY] rate, it is necessary to pay higher interest each time. This constantly repeated process is a vicious circle that transfers the country's assets to global capital and makes the economy dependent,” he added shortly after.

President Erdogan was unambiguous when insisting there’ll be “no going back” on a September change in interest rate policy that has since seen the Central Bank of the Republic of Turkey’s (CBRT) cash rate chopped from 19% down to 15%.

Above: GBP/TRY shown at daily intervals alongside USD/TRY.

• GBP/TRY rates at publication:
  Spot: 16.24
• High street bank rates (indicative band): 15.67-15.79
• Payment specialist rates (indicative band): 16.10-16.16
• Find out about specialist rates, here
• Set up an exchange rate alert, here
• Book your ideal rate, here

That first September rate cut was the initial catalyst for what has quickly become a torrid final quarter for the Turkish currency, which has been burdened by increasing domestic demand for Dollars and besieged by international speculators who’ve wagered heavily against the Lira.

"The model that makes the rich rich is usury. Interest makes the rich richer and the poor poorer. Whenever Turkey made a move to get out of the high interest clamp, it was exposed to manipulative pressure over the exchange rate,” Erdogan told TRT News on Tuesday.

“We will not allow them to destabilize growth and we will emerge from this spiral. Those who do not want this machine to be corrupted, want to attract us to this game again with currency manipulation. Global financial circles and internal collaborators will not be able to achieve that this time,” he added.

The Turkish president staunchly reiterated his somewhat unorthodox view that high interest rates lead to high inflation on Tuesday, a view which is described in policymaking circles as a “neo-fisherite rebellion.”

Another message that came across loud and clear in Tuesday’s address was that lower borrowing costs are a fundamental prerequisite or necessary ingredient for his government’s overall economic strategy.

Above: Selected remarks of the Turkish president. Click image for a closer inspection.

“We are now moving with the goal of becoming an economy that does not run a current account deficit and finance this deficit with foreign debt, but gains foreign currency and produces a current account surplus, and we are very close to this goal,” Erdogan said.

“Permanent stability in the exchange rate can be achieved not by borrowing short-term foreign currency at high interest rates, but by earning foreign currency through exports, tourism and other service revenues,” he also added.

Tuesday’s remarks and Wednesday’s response from the market are a strong indication that in the short-term at least the Turkish currency could be in for further hard times.

“We see the TRY reaching an undervaluation similar to 2018. Hence, we raise our USD-TRY forecast to 12.50 by end of 2021 (9.80 previously) and see the upward move extending to 14.0 in 2022. We admit that the uncertainties around our forecasts are high. The move of USD-TRY higher could be faster,” says Murat Toprak, a CEEMEA FX strategist at HSBC, writing in a research note only this Monday.

Toprak and the HSBC team estimated on Monday that the Lira’s 30% undervaluation could stretch to 40% by the middle of next year, although the scale of losses sustained by the Lira in recent days suggests that larger discount could now be likely to materialise much sooner.

Source: HSBC Research.