Lira’s fall reached Erdogan’s pain point

The Turkish lira gained 40% in the past 13 hours, sending USDTRY from 18.3 to 11. Despite the impressive amplitude, the exchange rate is only back to levels of a month ago.

There is no doubt that behind such a sharp strengthening were interventions by the central bank, which decided to spend a significant portion of its already meagre reserves to stem the chaos in the financial market.

Interventions alone won’t solve the situation, so to make a move looking bold, the Turkish president has announced compensating lira deposit holders if the currency’s fall exceeds the return on dollar deposits. Exporting companies will get the lira forward rate directly from the central bank as lira buyers have disappeared on the open market.

Lira’s fall reached Erdogan’s pain point - 1

There is a lack of important details, but it most likely means that more national currency will be printed, increasing the pressure on its value. In our view, this is a sure step towards hyperinflation.

Since the end of last week, the currency crisis has taken on more and more signs of a financial crisis, as the fall in the lira began to pull the stock markets, bringing trading to a halt. The surge in the lira promises to hurt the market even more in the short term today and in the next few days.

It seems that the lira’s fall has reached the pain point of the Turkish president and government. Although we and the markets, in general, have doubts about the correctness of the announced measures, still, the very appearance of these steps should signal an exit for speculators who have been betting on a collapse of the lira in recent months.

Alex Kuptsikevich

Financial market professional with 16-years' experience and Senior financial analyst at FxPro. Author of daily reviews on the impact of economic events with comments regularly featured in top international and Russian media. Covers fundamental analysis, global markets, foreign exchange market, gold, oil, cryptocurrencies.

Alex Kuptsikevich is a regular contributor to both digital and print media including CNBC, Forbes, Reuters, MarketWatch, BBC and Coindesk.