© Reuters. FILE PHOTO: A woman holds Turkish lira banknotes in this illustration taken on May 30, 2022. REUTERS/Dado Ruvić/Illustration
Written by Nevzat Difranoglu and Ali Kucukokmen
ISTANBUL (Reuters) – Sharp selling slowed on Thursday when it fell just 0.8 percent from 7.2 percent the day before, as traders said it was nearing more “normal” levels ahead of the expected appointment of a new central bank. governor governor
When the currency fell on Wednesday, dealers said it was a sign that authorities were easing restrictions on the foreign exchange market. When the situation stabilized on Thursday, some said the authorities were once again working to stabilize things by providing more liquidity.
“They are again defending the lira today,” said a banker who asked not to be named.
The currency stood at 23.38 against the dollar at 1448 GMT. Earlier it touched a record low of 23.3965, taking its losses to 20% this year.
Bankers said on Thursday that the Turkish Central Bank’s reserves data showed inflows of about $3 billion into deposit accounts last week from abroad.
In a sign of caution, Turkey’s five-year credit default swaps added 34 basis points from Wednesday’s close, crossing 500 points to reach 516 basis points, data from S&P Global (NYSE:: Market Intelligence) showed.
The sell-off of the lira the day before was the largest since the historic crash in late 2021, after the central bank cut interest rates in the face of soaring inflation as part of President Recep Tayyip Erdogan’s unorthodox policies.
Economists said the sharp drop in the lira was a signal that Ankara was moving away from state controls towards a freely traded currency, although there are many regulations and procedures that have yet to be rolled back.
Traders said the currency should not fall as it did on Wednesday as it is nearing levels that it does not need to defend by using up reserves.
“There is no panic atmosphere in the markets as in previous times when there were big losses. On the contrary, there is a perspective of normalization, which is important,” said a forex trader.
Tradeweb data showed that dollar-denominated bonds maturing in 2040 and 2045 suffered the largest declines, down 1.2 cents, while others posted similar losses.
Under Erdogan’s unorthodox programme, the authorities have been taking a hands-on role in foreign exchange markets, using tens of billions of dollars in reserves this year alone to keep the lira steady.
But after his re-election last month, Erdogan signaled a shift at the weekend by naming Mehmet Simsek, a former deputy prime minister respected by foreign investors, as Turkey’s new finance minister.
Simsek later said that economic policy needed to return to the “rational” ground and that there were no “quick fixes” for policy.
Change the method
As part of the policy pivot, Erdogan is considering appointing Hafiz Gay Erkan, the chief financial officer in the United States, as governor of the central bank, Reuters reported on Monday.
Investors said they were waiting for that appointment and also for a hike in the emergency interest rate – to about 25% from the current 8.5% – before the next meeting of the central bank on June 22.
If appointed, Erkan would be the fifth head of the central bank in four years and succeed Sahap Kavcioglu, who has spearheaded Erdogan’s campaign to cut interest rates since 2021.
Under pressure from the president, who describes himself as an “enemy” of interest rates, the bank under Kavjioglu cut its key interest rate to 8.5% from 19%, sparking a historic lira crisis in 2021 that sent inflation soaring to a 24-year high. Up 85.% last year.
Amid policy easing, authorities redirected foreign exchange and tapped into reserves to stabilize the lira — even the sell-off on Wednesday.
“We see the lira correction as a realization on behalf of Turkish policymakers that their liberal use of reserves to defend the currency has run its course for the time being,” said Eric Myerson, SEB’s chief emerging markets strategist.
He said that the lira could reach 27 against the dollar by the end of the year. “This is a downward adjustment of the lira’s value that reflects the expectations of the authorities trying to control the lira somewhat less,” Myerson wrote.
Data on Thursday showed that the central bank’s net foreign exchange reserves hit an all-time low of $5.7 billion as of June 2, as demand surged during the election.
Traders said the reserves could enter an upward trend, but highlighted the threat to the reserves from payments due to be made under a government scheme that protects lira deposits from foreign currency depreciation.