(Bloomberg) -- Signs that Turkish President Recep Tayyip Erdogan is loosening his grip on the currency market following re-election have brought back the type of sharp lira declines not seen in almost a year.

The lira has weakened about 6% since the start of May and hit a new record above 20 per US dollar this week. The slump comes as a measure of historical volatility for the currency jumped to 19% from 3% before the first round of elections in mid-May. Looking forward, implied volatility in the lira is expected to surpass that of all major currencies tracked by Bloomberg in the coming months.

That’s an eye-catching move for a currency that has been kept on a short leash by the central bank through near-daily backdoor interventions and emergency measures as part of Erdogan’s campaign to ensure stability in the exchange rate, which is closely watched by Turkish voters, ahead of general elections.

With Erdogan’s victory now assured and his party winning a firm majority in parliament, the costly micro-management is no longer needed, analysts say.

“There will be less focus on defending a certain level like there clearly was ahead of the election,” said Gordon Bowers, a London-based analyst at Columbia Threadneedle Investments. “Given the summer months should be running a current-account surplus, I see scope for more two-way trading.”

The central bank has fended off lira depreciation with emergency measures and backdoor interventions, a policy that succeeded in making it the dullest currency in emerging markets over the last six months. But the costs added up. Authorities spent nearly $200 billion over the past year and a half to buoy the lira and the central bank’s net foreign-exchange reserves have turned negative. 

The nation’s gaping current-account deficit — which stood at $4.5 billion in March — and foreign debt burden point to a grim outlook for the currency. Traders are now weighing the prospect of changes to Erdogan’s unconventional economic model, amid growing expectations that Mehmet Simsek, a market-friendly former finance minister, will return to the administration to help steer the economy.

“There is huge hope that the first step to orthodox monetary policy steps will emerge,” said Sergey Dergachev, the head of emerging-market corporate debt at Union Investment Privatfonds GmbH in Frankfurt.

The currency’s slide since Erdogan’s reelection, which has made it the worst performer in emerging markets since mid-May, suggests that state banks may have scaled back their foreign-exchange interventions, said Piotr Matys, a senior currency analyst at In Touch Capital Markets in London. 

“With the Erdogan administration having lesser incentive to prevent the lira from collapsing, the currency could become again a very good barometer of market sentiment,” Matys said.

Options traders see a 56% probability of the currency slumping to 30 per dollar in the fourth quarter, up from 31% when the results of Turkey’s first round of voting showed traders were wrong to wager on an end to Erdogan’s rule — and his unorthodox policy mix.

The three-month, six-month and 12-month forward contracts on the dollar-lira pair have reached record levels.

This is not a complete free pass to short the lira, though. While data on Wednesday showed that Turkey’s economy expanded faster than expected in the first quarter, the outlook is darkening for the rest of the year as Erdogan battles a cost-of-living crisis.  

The composition of Erdogan’s economic team and the credibility of its initial policy response will be key in attracting foreign money back to Turkey, according to analysts at Citigroup Inc.

The prospects for a return to conventional policy “look less promising” with Erdogan firmly in charge, but the central bank will find it increasingly challenging to keep interest rates, when adjusted for inflation, in deeply negative territory starting from the last quarter of the year, Citigroup analysts including Luis Costa wrote in a report on Tuesday. 

--With assistance from Tugce Ozsoy and Philip Sanders.

(Adds options bets on lira’s drop to 30 per dollar in 11th paragraph)

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