Financial markets hate surprises. Turkey’s President Tayyip Erdogan slammed currency markets to start the week. Two Days after the Central Bank of the Republic of Turkey (CBRT) hiked interest rates again (this time from 17 to 19%), Erdogan replaced the governor. The sacking occurred on Saturday, but the market clearly needed a lot more time to absorb the shock of the news. The Turkish lira (USD/TRY) immediately weakened after the open of trading. Just three months ago, the lira’s fever looked like it finally broke.
The CBRT’s site does not yet include news about the new governor. Instead, the site includes a terse, bolierplate statement from the new governor, Şahap Kavcıoğlu, about monetary policy:
“Under the duties and powers laid down by law, the Central Bank of the Republic of Turkey will continue to use the monetary policy tools effectively in line with its main objective of achieving a permanent fall in inflation.
The decline in inflation will foster macroeconomic stability through the fall in country risk premiums and a permanent improvement in financing costs, and will contribute to the development of conditions essential for sustainable growth that will enhance investment, production, exports and employment.
Accordingly, Monetary Policy Committee Meetings will be held as previously scheduled and announced to the public. In line with the transparency and predictability principles in policies, communication channels will be used effectively to address all the stakeholders.”
Kavcıoğlu looks to reassure markets that the CBRT will continue business as usual. Currency markets are far from reassured.
Extreme moves in financial markets always catch my interest. In most cases, markets cannot sustain extremes over an extended period of time, especially if fear is driving the extreme. Fear is oozing all over the USD/TRY chart even as USD/TRY is already trading off its highs of the day (USD/TRY began a fresh drop as I wrote this article). The initial surge looks like a move to price in a complete reversal of all the monetary tightening of the previous governor. For the short-term, I want the opposite side of that bet. The new regime presiding over monetary policy will likely first want to try to calm markets before cutting interest rates.
Accordingly, I started a small bullish bet on the Turkish lira. With spreads wide, I could not get a trade done efficiently. My order to short EUR/TRY simply filled before I could short USD/TRY. I prefer shorting the U.S. dollar given easy-money monetary and fiscal policies in the U.S. I am willing to grow the position up to the previous all-time high set just last November. If the fade from the initial trigger finger reaction continues much further, I will take profits.
Be careful out there!
Full disclosure: short EUR/TRY