Turkish lira slumps to record low; further losses likely

Investing.com - The Turkish lira slumped to a record low against the U.S. dollar Wednesday, as traders positioned for President Tayyip Erdogan's newly-elected government heading towards a more orthodox monetary policy.

At 09:00 ET (13:00 GMT), USD/TRY traded 7.2% higher at 23.0892, just below the pair’s record high of 23.2743 seen earlier this session.

Erdogan appointed Mehmet Simsek as finance minister shortly after his victory in the country’s presidential election runoff on the weekend. 

This appointment has been taken by the market as signaling a return to more orthodox monetary policies, leaving behind the unorthodox interest rate cuts in the face of high inflation that sent the lira sharply lower.

However, this could see an immediate jump in inflation, to the detriment of the lira.

Turkish annual inflation fell to 39.59% in May, largely due to the government providing natural gas free of charge. This policy could soon change as the government looks to rebuild its finances.

Data released last week showed central bank net forex reserves had dropped to their lowest level on record on May 26, standing at negative $4.4 billion.

Goldman Sachs revised its Turkish lira forecast late last week in the wake of President Tayyip Erdogan's cabinet revamp, saying it now expected the currency to weaken to 28 to the dollar in 12 months compared with a previous prediction of 22.

However, the influential investment bank now thinks the pair could reach the 28 level sooner than its previous estimate of a year.

“This estimate reflects inflation differentials and external pressures on the lira and also assumes a smooth pace of depreciation. However, we think our 12-month forecast could be reached sooner if the FX adjustment continues to be more front-loaded,” analysts at the bank wrote, in a note published Wednesday.