Turkish lira plumbs new depths as investors lose faith

ISTANBUL: Turkey's lira settled at its weakest level yet on Thursday, worth 8.7 to the dollar, after strong U.S. jobs data accelerated a three-month slide in which investors lost faith in authorities' ability to rein in double-digit inflation.

The lira, by far emerging markets' laggard this year, was at 8.705 at 17:19 GMT, a record low closing price. Its 1pc skid gathered speed when the dollar and U.S. yields jumped after stronger-than-expected U.S. payrolls data.

The currency has tumbled 17pc since mid-March when President Tayyip Erdogan, long a critic of high interest rates, ousted a hawkish and well-respected central bank chief.

The bank's current governor, Sahap Kavcioglu, sought on a call on Wednesday to reassure big foreign investors that worries about premature rate cuts were unjustified.

But several of those on the call told Reuters they were unconvinced, especially after Erdogan - seen by many to determine rates - said a day earlier that policy easing should begin in the next two months.

The president has abruptly fired three bank chiefs in two years, leaving its reputation badly damaged and making the country more vulnerable to financial crisis, they said.

"I think Kavcioglu is on a tourist visa at the (central bank) so what he says or doesn't say may not matter very much," said Erik Meyersson, Stockholm-based senior economist at Handelsbanken, who was on the call.

"If Erdogan says rates are coming down in July or August, well that's probably what will happen."

Those who listened to Kavcioglu and other bank officials on the call said they still expected it to begin cutting the policy rate from 19pc in the third quarter.

'PLEASE THE PRESIDENT'

Inflation rose above 17pc in recent months but unexpectedly dipped to 16.6pc in May due largely to fallout from a coronavirus lockdown, official data showed on Thursday.

Still, most analysts expect consumer prices to flat-line for most of the year because of the currency weakness and high commodity prices, which raise import costs. The lira hit an intra-day record of 8.88 to the dollar on Wednesday.

Tourism revenues, usually an offset to chronically high current account deficits, have also been hit hard by the pandemic.

"All these factors are making us less constructive in Turkey than other ... emerging markets (EMs)," said Shamaila Khan, head of EM debt strategies at AllianceBernstein in New York.

"It is really hard to figure out how they gain credibility. Obviously whenever they gain credibility there are political statements that come out on interest rates that are not helpful," she said.

The World Bank and other analysts say a big risk for Turkey is a prompt policy tightening by the U.S. Federal Reserve, which would lift the dollar more and pull funds from vulnerable EMs.

Kavcioglu told investors on the call that inflation would enter a significant downward trend around September or October.

Nikolay Markov, senior economist at Pictet Asset Management, said the call convinced him that rates would be cut by mid-summer and that Kavcioglu understood he needed to "please the president".

"He seemed willing to do whatever it takes to delay a decision for a rate cut as much as possible, while also being aware of the need for it at some point," Markov said.