EMERGING MARKETS-Turkish lira sinks to near record low after central bank shake-up

PUBLISHED: Mon, 22 Mar 2021 10:26:13 GMT

* Lira crashes 15% to approach November’s record low

* Turkish stock index sinks 9% to three-month low

* South African rand slips ahead of central bank meeting

* Rouble eases on looming sanctions against Moscow (Adds analyst comments; updates prices)

By Sagarika Jaisinghani

March 22 (Reuters) – Turkey’s lira plunged to a near record low and dollar bonds sold off on Monday following President Tayyip Erdogan’s shock decision to oust a hawkish central bank governor, with the risk-off sentiment also hitting other emerging market currencies.

The lira tumbled as much as 15% to 8.4850 versus the dollar – near November’s record low of 8.58 – after the appointment of Sahap Kavcioglu, a former banker and ruling party lawmaker, sparked fears of a reversal of recent rate hikes.

The MSCI emerging market currency index was down about 0.1%, with high-yielding currencies including the South African rand and the Mexican peso easing about 0.8% and 1.4%, respectively.

By 1009 GMT, the lira had recovered some of its losses to trade around 7.8525 as Finance Minister Lutfi Elvan said Turkey would stick to free market rules.

“It may well be that interest rate hikes are once again permitted by Erdogan in a phase of crisis-like lira depreciation but the recent developments should have shown currency traders that even then a sustainable monetary policy regime change is not to be expected,” said Ulrich Leuchtmann, head of FX at Commerzbank.

“The calming effect of interest rate hikes has probably been largely destroyed.”

The lira had bounced 15% in the last few weeks of 2020 as the central bank hiked interest rates by 675 basis points, but the currency still ended the year down about 20% on worries around Turkey’s depleted forex reserves and negative real interest rates.

Another rate hike last week had lifted the lira about 3% and helped the MSCI emerging markets currency index snap a four-week losing streak. Central banks in Brazil and Russia also hiked interest rates last week.

The South African rand slipped ahead of a three-day meeting of the South Africa Reserve Bank beginning Tuesday where the central bank is largely expected to keep interest rates unchanged.

The Russian rouble eased to a more than two-week low versus the dollar as new sanctions against Moscow loomed.

Analysts at Goldman Sachs said the rouble, rand, Brazilian real and Mexican peso were among currencies most likely to see a spillover from the crash in the lira “given the recent re-build of foreign positioning and the overall core rate environment”.

Turkey’s longer-dated dollar-denominated sovereign bonds suffered their biggest daily drop on record, while a 9% plunge in the stock index wiped out about $4.5 billion from the market capitalisation of Turkish firms.

The iShares MSCI Turkey ETF sank 19% in early U.S. premarket trading, while the London-listed HSBC MSCI Turkey ETF and Paris-listed Lyxor MSCI Turkey ETF were both set for their worst session on record.

Societe Generale said the dismissal of Naci Agbal had left Turkey “beyond the point of no return” and predicted the lira to weaken to 9.70 against the dollar by end of the second quarter.

A broader index of emerging market stocks was up about 0.1%.

For GRAPHIC on emerging market FX performance in 2021, see http://tmsnrt.rs/2egbfVh For GRAPHIC on MSCI emerging index performance in 2021, see https://tmsnrt.rs/2OusNdX

For TOP NEWS across emerging markets

For CENTRAL EUROPE market report, see

For TURKISH market report, see

For RUSSIAN market report, see

(Reporting by Sagarika Jaisinghani in Bengaluru; Additional reporting by Tom Arnold in London; Editing by Subhranshu Sahu)

(c) Copyright Thomson Reuters 2021. Click For Restrictions – https://agency.reuters.com/en/copyright.html

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