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Turkish lira plunges as state banks retreat from defence

Tan KW
Publish date: Wed, 07 Jun 2023, 11:07 PM
Tan KW
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Türkiye's lira plunged to a record low as traders said state lenders had halted dollar sales to defend it, in a sign the new economic administration is giving up on costly interventions as part of an expected turn toward more conventional economic policies.

The currency dropped about 7%, the most in more than a year, to as low as 23.1621 per dollar on Wednesday, weakening for a 12th straight day. It was trading 6.5% lower at 11.45am in Istanbul.

President Recep Tayyip Erdogan, who won reelection on May 28, has championed an unorthodox economic policy based on ultra-low interest rates, which forced state institutions to compensate with exchange-rate interventions and frequent regulatory tweaks. The costs of that policy mix piled up in the form of depleted foreign-currency reserves, an inflationary spike, and an exodus of foreign capital, and markets had been pricing in a large depreciation following the vote as investors bet that it was unsustainable.

Erdogan’s appointment of former Merrill Lynch strategist Mehmet Simsek as his next treasury and finance minister has intensified expectations of a return to orthodoxy and abandonment of state intervention in favour of allowing the market to determine fair value for Turkish assets. Since the election on May 28, the lira has weakened more than 13% against the dollar.

Türkiye’s state banks don’t comment on their interventions in the foreign-exchange market. A former governor of the central bank said in 2020 that state-owned lenders carry out transactions in line with regulatory limits and could continue to be active in the currency market.

While the lira plunged, other Turkish markets on Wednesday indicated confidence that the policy shift would be positive. The main stocks index rose 3.1%, extending gains since the vote to 21% and reversing this year’s losses. Turkey’s dollar bonds also extended their advance, with the extra yield investors demand to hold Türkiye’s dollar debt over US Treasuries narrowing 44 basis points this week, according to a JPMorgan Chase & Co. index.

The central bank’s next meeting to set interest rates is scheduled for June 22 and investors expect a hike, fueled by projections of a change at the top post, currently occupied by Governor Sahap Kavcioglu. Like Erdogan, Kavcioglu has championed low interest rates, cutting the benchmark rate to 8.5% from 19% during his tenure even as inflation accelerated to a 24-year high above 85% last year.

Hafize Gaye Erkan, a banking executive in the US, is a potential candidate for governor and met Simsek on Monday in Ankara, people with knowledge of the discussions told Bloomberg.

Erkan worked for nearly a decade at Goldman Sachs Group Inc. and she’s the former co-CEO of San Francisco based lender First Republic Bank. Just over a year after her departure from First Republic, it became the second-biggest bank failure in US history.

Simsek and his team will face an uphill battle, with the lira’s weakness adding to elevated inflationary pressures ahead of local elections next year. Despite headline inflation’s slowdown last month, core inflation accelerated.

“We expect the government’s pricing and tax policies, together with pre-election and quake related fiscal spending and an accommodating monetary policy stance, to add to inflationary pressures going forward. As such, we forecast price gains to move back above 40% in the summer and end the year at 43%,” economist Selva Bahar Baziki said.

Goldman Sachs Group Inc analysts recently revised their forecast for the dollar-lira pair higher, citing increased pressure on the currency. The bank sees the lira depreciating to 28 per dollar in 12 months, compared with a previous projection of 22, according to a report dated June 3.

The options market is currently pricing about an 80% chance that the lira will hit 25 per dollar within the next three months, and a more than 60% chance that it could hit 27 per dollar.


  - Bloomberg


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