26.03.202110:56 Forex Analysis & Reviews: Lira plummets after Turkish president sacks Central Bank's chief

Many are becoming increasingly concerned because of inflation, depreciating currencies and rapid depletion of reserves. Then, in the middle of it, another controversy occurred, that is, the dismissal of President Recep Erdogan to Turkey's Central Bank chief.

This is already the third dismissal in two years, as a result of which lira declined very sharply in the market. But President Erdogan said Turkey's economy is holding up, and that market volatility this week does not reflect changes on it.

However, in the same speech, he called for selling foreign exchange assets and gold, and buying lira-based financial instruments to stabilize the beleaguered currency, which has lost 10% of its value since Friday.

"The chances of seeing a currency depreciation is increasing," said Capital Economics. They also pointed out that investor confidence was high before because former Central Bank governor Naci Agbal raised key interest rates by 875 basis points in order to fight double-digit inflation.

But Erdogan has long held the unorthodox view that higher interest rates cause inflation and are detrimental. In fact, many said it was only a matter of time before Agbal was replaced by someone more convenient to Erdogan and of similar views. This prompted investors' fears that the central bank lacks autonomy, and that inflation and currency crisis will soon shake the country.

To add to that, many say the new Central Bank chief, Sahap Kavcioglu, is inexperienced in the area, thereby increasing concerns about uncontrolled inflation.

When the lira collapsed last May 2018, it was because of similar concerns on the monetary policy. It shocked many Spanish and French banks that were heavily reliant on Turkish assets. But according to Can Selcuki, managing director of Istanbul Economics Research, this event is not a problem now.

This is because to date, Spain's banking sector is leading in terms of engagement with the Turkish public sector. It owns $ 14.7 billion Turkish assets, including government bonds. Meanwhile, France has $ 6.4 billion in investment.

But pressure on lira will only intensify, claimed analysts from Goldman Sachs.

Before, the strategy of the Turkish central bank to strengthen the currency was to buy more dollar pairs, which burns up its foreign exchange reserves.

"Resuming currency interventions like this may be the initial reaction, but buffers are comparatively low," said the Goldman Sachs.

According to them, Turkey's gross foreign exchange reserves amount to $ 35.7 billion, which, in our opinion, is "insufficient to support ongoing interventions."

"Erdogan's actions could be the last straw for many," said Tim Ash, senior strategist at Bluebay Asset Management. "It seriously undermines Turkey's reputation among investors," he added.

To date, lira has lost about 15% of its market value.