Summary:

• USDTRY and EURTRY both rise to new all-time highs
• Lira extends recent declines as Fitch warns on monetary policy
• Surge in local Diesel costs reveals impact of currency depreciation

The rout on the Turkish Lira has shown little sign of easing up with the currency falling to record lows against both the Euro and the US dollar. Whilst it would be an over-simplification to attribute this latest decline to a fresh development a warning from Fitch will have done little to aide the Lira’s cause. The ratings agency has warned that Turkey’s sovereign credit profile could come under pressure if central bank independence is challenged after next month’s snap election, which is widely expected to see President Erdogan consolidate his power. 

 USDTRY has hit another all-time high today, with the market gaining almost 10% in the last 8 sessions. Price is up by almost 1 whole Lira since the low seen back in January. Source; xStation

“Monetary policy in Turkey has long been subject to political constraints, but an explicit threat to curb the central bank’s independence increases risks to the policymaking environment and to policy effectiveness, not only from political interference but from the greater pressure on the [Turkish central bank] to prove its independence,” Fitch said.

 TRY has dropped by 8.9% against the Euro and 13.5% against USD in the past month. Source: xStation

A plummeting local currency can obviously have a severe effect on the economy, and one area where this is particularly apparent is in the price of Diesel. Comparing the price in the Mediterranean for Diesel in US dollars with the price in Turkish Lira reveals a large disconnect over the past couple of years. 

 The cost of diesel in Lira terms has rocketed since 2016. Source: Bloomberg

With the price of Oil recently hitting a 3 1/2 year high and the lira falling to a record low, the price in domestic currency terms has surged, leaving the government with two options; 1) pass on the soaring bill or 2) cushion the blow for the consumer. Given that Turkey is heading back to the polls next month, it should come as no surprise that the government have decided upon the latter and announced a reduction in a special consumption tax in an effort to shield consumers from the rising costs of fuel. 

To put these latest moves in perspective, if we look back to the start of 2014, the Turkish central bank hiked their overnight lending rate by 550 basis points to 12% which caused the USDTRY rate to fall to 2.18 from 2.25 after hitting a then record high of 2.39 the day before. Since then the rate has pretty much doubled!

 The USDTRY has almost doubled since January 2014 with the Turkish central bank hiked by 5.5% to 12%. Source: xStation