With the prospect of another interest rate cut looming after the removal of three key policy makers, the fear now is that households and businesses will switch back to dollars and euros in droves.
The Turkish lira is losing favor with local investors again and risks exacerbating a depreciation that has dragged the currency to successive all-time lows over the past month.
Residents bought a net $ 1.7 billion in foreign currency in the week ending in October. 8, according to the latest central bank data, snapping a three-week selling streak, the longest in half a year, that helped smooth the slide.
With the prospect of another interest rate cut looming after the removal of three key policy makers Wednesday night, the fear now is that households and businesses will switch back to dollars and euros in droves. The lira fell as much as 1.1% to a new all-time low of 9.1883 per dollar on Thursday.
Currency purchases by local investors could put “additional pressure on the Turkish lira,” said Onur Ilgen, head of treasury at MUFG Bank Turkey in Istanbul, noting that the recent selling streak was motivated by profit-taking. .
Residents have $ 234 billion in foreign currency, equivalent to about half of all deposits. While they are nibbler traders, buying dollars when the lira is strong and selling when it is weak, in the long run they tend to accumulate hard currency.
It’s a hedge against inflation that has degraded the lira and eroded your savings. The Turkish currency is on track for its ninth consecutive year of depreciation, having lost more than 80% of its value since the end of 2012, the most in the developing world after the Argentine peso.
“If locals are more concerned about the effects of lower interest rates on the lira, there is room for Turks to shift more deposits from lira to dollars,” said Nick Stadtmiller, director of emerging markets at Medley Global Advisors in New York.
Last month, the central bank unexpectedly cut interest rates to 18%, even with inflation just below 20%. Investors say policymakers are aligning themselves with Erdogan’s call for lower interest rates while ignoring risks to the outlook.
There is speculation that the president is now paving the way for another cut after he fired three members of the central bank’s interest rate-setting committee in a midnight decree.
The side of commerce that residents decide to take over in the coming days and weeks is also important because foreign investors have already exited the market. They now own less than 5% of public debt in local currency, up from 30% in 2013.
“I think the downside risk for the lira with looser monetary policy is through internal flows, not external outflows,” Stadtmiller said.
A redemptive factor for the lira is that credit growth is slowing, which should help reduce the current account deficit, reducing demand for foreign exchange in Turkey, according to Evren Kirikoglu, an independent strategist based in Istanbul.
Monday’s data showed that the economy posted its first monthly surplus since October. 2020.
But even then, with the lira breaking the psychologically important mark of 9 per dollar this week, local investors could “stop and even reverse” their purchases of foreign currency, Kirikoglu said.