(Bloomberg) -- The Turkish lira retreated as traders assessed prospects for monetary and fiscal policy after President Recep Tayyip Erdogan replaced his finance minister and lashed out against “the shackles” of interest rates.
The currency fell as much as 3.8% in early Istanbul trading, after surging 5.8% on Monday, the most on a closing basis in more than two years. It pared some of Monday's decline to trade 1.2% weaker at 8.1676 per dollar after the new finance chief, Lutfi Elvan, pledged to prioritize reining in inflation and focusing on a “market friendly” transformation of the economy.
Erdogan appointed Elvan, a former deputy prime minister, as treasury and finance minister after the Turkish leader's son-in-law abruptly stepped down. He'd already fired central-bank Governor Murat Uysal. Overseas traders flocked to the lira on Monday, betting Uysal's replacement Naci Agbal will bring more orthodoxy to monetary policy by raising interest rates.
Erdogan Vows to Stick With Free Market Economy After Overhaul
Demand for foreign currency from retail and corporate investors continued on Tuesday, while foreigners' purchases of liras slowed down, dragging the currency weaker.
“The lira rally was a little overdone and the currency is now consolidating” around 8.20 to 8.30 per dollar, said Nigel Rendell, a senior analyst at Medley Global Advisors in London. “This is likely to be the center of its trading range over the coming days, in the run-up to the monetary policy meeting on November 19.”
The changes in Turkey's financial landscape may usher in a new era for economic policy, although it remains unclear whether the president's unorthodox policy preferences will be rejected or more wholeheartedly embraced under new management.
Read more: Turkey Investors Weigh Possible Policy Moves After Shakeup
“Agbal has a huge weight on his shoulders,” Rendell said. “If he fails to hike rates sufficiently or prevaricates next week the markets will punish his timidity by driving the lira lower. A retest of the currency's low against the dollar seen last week would be inevitable.”
Monday's rally “was more of a hopeful, knee-jerk reaction, that a changing of the guard would also result in a change of policy,” said Todd Schubert, head of fixed-income research at Bank of Singapore. “The realization is that what is necessary to stem the decline of the lira is an independent monetary authority that will implement orthodox monetary policies to stem inflation, which is widely accepted to mean raising rates.”
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