Lira bears out in force as vote re-run ramps up political risk


The Turkish lira was 2.1% weaker against the dollar on Monday after President Tayyip Erdogan dismissed the central bank governor, laying bare differences between them over the timing of interest rate cuts to revive the recession-hit economy.

DUBAI: The Turkish lira tumbled the most in emerging markets and stocks erased this year’s gains after investors interpreted the decision to redo Istanbul’s municipal vote as another manifestation of President Recep Tayyip Erdogan’s influence over independent institutions.

The currency weakened to a seven-month low as implied volatility rose. The main stock index dropped as much as 2.5 percent, fueled by concerns that an extended period of political turmoil would derail efforts to lift the economy out of its first recession in a decade.

The ruling “inflicts a dramatic blow to the rule of law and weakens democratic standards in Turkey,” said Cristian Maggio, the head of emerging-market strategy at TD Securities in London, who also expects the central bank to raise interest rates by 600 basis points through July. 

“Since before the municipal vote, markets have had time to debate about these two matters - it is now clear where the needle is moving.”

He sees the lira weakening more than 20 percent to 7.9 per dollar by the end of June.

The decision drew instant condemnation from the opposition and some European officials, who viewed it as more evidence of Erdogan’s increasingly authoritarian rule. 

The ruling AK Party and the country’s election commission said the decision was taken because of irregularities that marred the vote in March. The president was due to address parliament at 11:45 a.m. in Istanbul.

The lira, which weakened 1.4 percent to 6.1658 at 10:57 a.m., was already under pressure before the ruling.

The currency breached the key 6-per-dollar mark on Monday amid a sell-off in developing nation assets on trade war woes. 

Its one-month implied volatility climbed to 23 percent, and similar maturity risk reversals, which fell for nine-straight days through Friday, rose the most since March 22 on a closing basis to 7.82 percentage points on Tuesday.

“Turkey has had fair and free elections since 1950,” Soner Cagaptay, the director of the Turkish Research Program at the Washington Institute for Near East Policy, said on Twitter.

The “decision to reverse the March 31 Istanbul mayoral race, in which the governing party lost, is the book end of a historic era. Until now, it was one man, one vote, from now on it is: vote until the governing party wins,” he said. - Bloomberg

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