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- "The Turkish lira is TOAST," John Hopkins Economist Steve Hanke writes in a tweet. "Pres Erodgan's insistence on low-interest rates sent the lira into a death spiral."
- The lira tumbles nearly 12% against the U.S. dollar on Tuesday, and has lost 40% of its value this year alone, making it the worst performing emerging market currency in 2021, Wells Fargo economist Brendan McKenna writes in a note.
- The iShares MSCI Turkey ETF is also down 7.3% intra-day.
- Mckenna thinks the lira will drop to 13.00 by Q2 of next year, and eventually reaching 14.50 by the beginning of Q1 2023.
- The lira is now changing hands at 12.65, down from 13.30 earlier in the session.
- Still, "spillover from a sharp Turkish lira selloff driven monetary policy decisions directly onto other developing currencies is unlikely," the economist says.
- In response to the selloff, McKenna expects Turkish regulators to instruct local banks to re-start selling U.S. dollars and buying lira. But these banks likely don't have enough dollars to disrupt the lira's downward pressure, he says.
- Of course, the country is also likely to reach out to allies so it can enhance U.S. dollar FX swap lines for increased currency availability.
- However, "we doubt these FX swap lines, if secured, will do much to alter the depreciation path ahead for the lira."
- Earlier, Turkey's president and central bank chief meet.