EM Thematic October 14, 2021 / 10:01 am UTC

No End Of Bad News For The Lira

By Francesca Beausang

While it is expensive to short the lira on carry grounds, we think USD/TRY will remain above the recently broken 9.0 resistance into year-end. This is likely given rate cut implications of the dismissal of key officials from the central bank, expectations of a new Syria offensive and political instability.

The dismissal of two deputy governors and Monetary Policy Committee (MPC) member Abdullah Yavas on Wednesday was reportedly based on their opposition to rate cuts – Kucuk was the only member of the committee who voted against the September 100bp rate cut. This decision reinforces the market’s expectation of another cut at the 21 October MPC meeting, in line with our longstanding view. We expect another 100bp easing after that.

Meanwhile, political instability is likely to rise into year-end, both from a foreign policy and domestic perspective. Internationally, Erdogan’s talk of a Syria offensive comes as a surprise and could result in frictions with the U.S., which backs Kurdish militants in the region that are opposed by Turkey. Domestically, political instability is likely to rise as the opposition is finally kicking itself into action, taking advantage of the fact that support for Erdogan is falling - the AKP has around 31-33% of the vote compared with 42.6% at parliamentary elections in 2018 and AKP ally the MHP has less than the 10% threshold required to enter parliament. The six opposition parties have agreed to focus on the independence of the judiciary, media and academia, laws governing elections and political parties, and boosting democracy and the separation of powers. They also want to restore Turkey to a parliamentary system of government and plan weekly meetings to agree shared principles by year-end. A united opposition is unheard of in Turkey so this should send shivers down Erdogan’s spine and spook the markets.

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I, Francesca Beausang, the lead analyst certify that the views expressed herein are mine and are clear, fair and not misleading at the time of publication. They have not been influenced by any relationship, either a personal relationship of mine or a relationship of the firm, to any entity described or referred to herein nor to any client of Continuum Economics nor has any inducement been received in relation to those views. I further certify that in the preparation and publication of this report I have at all times followed all relevant Continuum Economics compliance protocols including those reasonably seeking to prevent the receipt or misuse of material non-public information.