Lira slumps as Turkey votes to press on with constitutional reform debate

Turkish Lira witnessed vicious fall yesterday, hitting a new low of 3.74 versus the USD. USD/TRY is extending the spike on Tuesday, up 1.76 percent on the day, hitting new record highs at 3.7862.

Turkey's parliament voted on Tuesday to press on with debate about a constitutional reform package that would expand the powers of President Tayyip Erdogan. Opponents to the reform fear it will fuel authoritarianism. If passed the Erdogan will be able to appoint and dismiss government ministers, take back the leadership of the ruling party, and govern until 2029.

All relevant fundamentals in Turkey point towards a steady depreciation trend for the Lira. Central Bank of Turkey's (CBT) refusal to hike rates even as inflation re-accelerates remains one of the primary drivers of the trend, as this has kick-started the familiar inflation-FX spiral once again.

"We may expect to see sharper moves on days when the USD is generally strengthening, but this is not really about different day to day developments, and will probably continue until CBT's hand is forced in the shape of a rate hike. We expect another 50bps hike this month, but it would have to be sharper if CBT really wants to put an end to the trend." said Commerzbank in a report.