Turkish lira, stocks and bonds tumble after Istanbul mayor detained

Turkey's lira tumbled to a record low of 42 per dollar before recouping most of the day's losses on Wednesday, while bonds and stocks also slid after authorities detained President Tayyip Erdogan's main political rival.

After weakening to a record low of 42 per dollar earlier, the lira closed at 37.665 per dollar, a 2.6% decline. Early in the overnight session, it was bid at 38.

The benchmark stock index fell near 9%, the most in four years.

The move against Istanbul mayor Ekrem Imamoglu was called "a coup attempt" by the opposition and appears to cap a months-long legal crackdown on opposition figures which has been condemned as a politicized attempt to silence dissent.

"The market has been increasingly concerned about political probes and arrests in Turkey," said Tatha Ghose, an emerging market and foreign exchange analyst at Commerzbank, adding a lira rate of 40 to the dollar would be too inflationary for the central bank to tolerate.

"(Turkey's lira) is the most heavily positioned carry-trade in the emerging markets space at the moment in our view, and a sharp move could potentially lead to further outflows," said Frantisek Taborsky, EMEA FX & fixed income strategist at ING. "On the other hand, we should see local banks providing some FX support."

Turkey's international government bonds also came under pressure with longer-dated maturities suffering the sharpest falls. The 2045 maturity was down 1.3 cents at 85.35 cents on the dollar.

Monetary policy

Finance Minister Mehmet Simsek said they were doing everything necessary to ensure healthy functioning of the markets, without giving further details.

Bankers calculate that the Turkish central bank sold a minimum of $5 billion in FX after the lira's crash, while some say it may have already reached $10 billion for the day.

Some analysts and investors were also concerned about the knock-on effect for monetary policy, worrying that the sharp decline in the lira could delay or halt the rate-cutting cycle since the central bank has been ensuring real appreciation of the currency for months.

The central bank had in December embarked on an easing cycle after an 18-month tightening effort that reversed years of unorthodox economic policies and easy money championed by Erdogan, which had seen the economy run red hot and inflation exceeding 70%. Erdogan has supported the steps by the central bank for a more orthodox policy.

"With this FX shock they need to keep rates where they are for now," one banker said.

Reflecting widespread investor worries, stocks also sold off. Turkish blue-chip stocks closed down 8.72%, the most for any day since March 2021. The banking sub-index closed down 9.88%.

"A wave of selling was triggered after Imamoglu... was detained," said Serhat Baskurt, algorithmic operations manager at ALB Yatırım. "Political uncertainty currently prevails and concerns about foreign investors leaving the country have increased."

Baskurt said he expected the decline on the stock exchange to continue over the coming days.