Turkey’s sickly currency closed the week at 8.08 against the American dollar, thus officially surrendering all its gains during the brief tenure of former Central Bank (CBRT) governor, Mr Naci Agbal. This week the depreciation of the TL will accelerate, as the fateful Monetary Policy Council meeting of CBRT approaches (15 April).
“From here, we see USD/TRY to drift in to the 8.00-8.50 range. We think slowing inflation and using FX reserves may limit the weakening in TRY spot”, wrote Danske Bank analysts in their recent “Emerging Markets Monthly: The narrative of strong EM FX is fading”.
“The sell-off in Turkish Lira isn’t really about Turkey. It’s about a central bank governor who hiked to get ahead of rising US yields & the difficult politics around that given weak growth. So Lira is really the first victim of US fiscal largesse & contagion risk may be high..” added IIF chief economist Mr Robin Brooks on his twitter account…
“– Making predictions in emerging markets has always been a tough job. For Turkey, it’s become near impossible.
Bank strategists tore up their bullish lira forecasts this week after President Recep Tayyip Erdogan fired the head of the central bank, and now are largely in the dark on where the currency goes next. Some are using past crises as a guide, while others are watching for evidence that the central bank is propping up the currency and studying the swaps market.
The difficulty is that even though Governor Sahap Kavcioglu has pledged to deliver price stability, analysts say he’s likely to follow the wishes of Erdogan and start lowering interest rates at some point”, comments Bloomberg glibly.
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All of these are true and explain to some extent my humble prediction that the Turkish currency will face glacial pressures in the coming weeks. However, the main reason is the residents, who sold an estimated $7-8 billion in FX to somewhat balance the currency market last week. These sales are by high net-worth individuals who “play the market” to maximize returns. The vast bulk of FX deposits in Turkish commercial banks are held by conservative savers who prefer FX over TL because of rising inflation and Erdogan’s unpredictable policies, which could wipe off a year’s worth of accumulated interest on TL deposit overnight.
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These majority will add to its FX deposits in the coming weeks, in fear of rate cuts further destabilizing the exchange rate.
Judging by reports in Bloomberg, Reuters and FT, I also estimate some big macro-funds preferred to keep their positions in Turkey, thanks to the first day-on-the-job announcement of Prof Kavcioglu that rates will not be cut until 15 April regular CBRT meeting. As implied currency volatility remains high, while CDSs hover around 450 basis points, staying in TL assets is a pain trade with little upside for these laggards. They, too, shall soon hit the door.
In the previous episodes of currency volatility, former economy czar instructed CBRT to swap FX to state banks, which sold in the spot market to brake TL’s depreciation. So far, Prof Kavcioglu showed no intention to resort to the backdoor methods. Even if he does, today’s CBRT is much poorer thanks to Albayrak’ frivolous FX intervention policies.
Thanks to the main opposition party, CHP, the dirty tricks played through off-balance sheet swap transactions with state banks have been exposed and become common knowledge. If they start again, I’d be worried about a run on banks.
Mr Erdogan doesn’t seem to understand the old adage “You can’t wash in the same river twice” but savers do.
By Atilla Yesilada, Global Source Country Analyst
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