USD/TRY’s rapid ascent accelerates, pair momentarily esclipses 13.00 level

• USD/TRY shot momentarily above 13.00 and nearly hit 13.50, before sharply dropping back, as volatile lira conditions worsen.
• With no signs of an about-face in inappropriately dovish CBRT policy, the lira remains highly vulnerable to further selling.

Rapid depreciation in the value of the Turkish lira has accelerated as the start of the US trading session draws closer. USD/TRY is experiencing highly volatile trading conditions and just in the last hour underwent what might be described as a flash crash, vaulting above 13.00 and as high as 13.50 only to then reverse back to the 12.70s in a matter of minutes. At current levels just under 13.00, the pair is up by over 12% on the day, taking its gains on the month to more than 30% and gains on the year to north of 70%. That means that the Turkish lira has now lost over 40% of its worth when compared to the US dollar this year.

The selling pressure reflects a continued flight of capital out of the country as fears continue to build that Turkish President Recep Erdogan’s steps to undermine central bank independence risk sending the country into hyperinflation and economic ruin. USD/TRY upside was worsened on Tuesday morning after Turkish President Recep Erdogan rebuffed the notion of an early election, saying the date is set to June 2023. Amid the recent tumble in the value of the lira, opposition parties have been calling for an early election.

The Turkish President on Monday defended the CBRT’s recent decision to continue cutting interest rates (to 14.00%), despite inflation in October closing in on 20%, and vowed to win his “economic war of independence”. Erdogan unconventionally believes that inflation can be brought under control by lowering interest rates, not raising them, and has destroyed any semblance of CBRT independence by firing officials who refuse to do his bidding.

Former central bank deputy governor Semih Tumen, who was fired by Erdogan last month, wrote scathing criticism of CBRT policy on Twitter. “This irrational experiment which has no chance of success must be abandoned immediately and we must return to quality policies which protect the Turkish lira's value and the prosperity of the Turkish people” he said. As the lira’s tumble accelerates, analysts are already now starting to expect that the CBRT is going to be forced into implementing emergency rate hikes. But there are no signs of such a policy shift just yet, and as such, the lira remains highly vulnerable to further selling pressure.