Turkish Currency Hits All-time Law Amid Market Jitters

Andrew Cummings
August 10, 2020

The lira was trading at 7.29 against the greenback around 1400 GMT, suffering a loss of more than 3.5 percent since the start of the day - the lowest since May when it reached a then-record low of 7.24.

The lira also recorded its lowest level against the euro, trading 8.64 against the European currency at 1400 GMT, amounting to a almost 3.5 percent depreciation. Authorities will also exempt foreign banks from some restrictions on swapping foreign exchange for liras after easing access for global development institutions.

But after two weeks of volatility, Goldman Sachs now expects 175 points of hikes by year end.

Jason Tuvey, senior emerging markets economist at London-based Capital Economics, predicted that the central bank's efforts to stem the lira's decline "will ultimately prove futile and that the lira has further to fall".

The central bank, which is due to hold its next monetary policy meeting August 20, said Thursday it was closely monitoring price developments in the market and would use "all available instruments to reduce the excessive volatility". The cost of insuring against default on $10,000 of five-year Turkish dollar-denominated bonds using derivatives contracts called credit default swaps climbed to $589 a year Thursday, from $238 a year in February.

Goldman Sachs analysts said it the bank would likely lift the average funding rate as high as the policy rate, adding it could also raise the 9.75% overnight rate and even lift a late lending rate from 11.25%.

That sent the interest rate linked to borrowing Turkish lira in exchange for dollars in offshore markets as high as 1,000% Tuesday in annualized terms, according to analysts and investors, in yet another sign of how the currency's market has become dysfunctional.

Turkey's banking watchdog on Thursday eased limits on Turkish lira transactions with foreign lenders.

President Recep Tayyip Erdogan has repeated his preference for low rates and sacked the last central bank governor for not following instructions.

Some fear that in a worst-case scenario, interventions to stabilize the lira lose steam as the central bank's reserves run thin, prompting further depreciation, inflation and a ballooning current account deficit.

Ankara's appeals for funding from the U.S. Federal Reserve and other central banks have only yielded a deal with Qatar.

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