Turkey’s lira was one of the worst performers against the U.S. dollar in Friday trading — as the greenback rallied more than 5% against it — on track for its worst daily percentage drop since August.
So what happened?
Well, Turkey’s story hasn’t been rosy for a while, and the chickens might be coming home to roost. Earlier this month, gross domestic product data showed that Turkey entered a technical recession in the fourth quarter of 2018. That development comes on the coattails of last summer’s currency crisis, which saw the lira trapped in a downward spiral as consumer prices skyrocket.
Cutting interest rates could help stimulate the economy, but with steep inflation, that is hard for the country’s central bank.
Inflation reached its recent peak in October, rising more than 25%, and has since come down, but it remained in double digits at 19.7% in February, FactSet data show. And while Ankara’s account deficit improved, its financial account deteriorated. On top of that, the country’s banking system is struggling with nonperforming loans. And as locals buy dollars, Turkey is becoming more dollarized. That means its denizens are converting lira to U.S. dollars, which in turn reinforces the pressure on the lira.
So, while the lira — and many other embattled emerging-market currencies — have bounced back from last year’s lows, recent currency moves may serve as a reminder that no fundamental policy changes have occurred to warrant those recoveries.
In the year-to-date, the lira has dropped nearly 8% against the U.S. dollar
and more than 6% against the euro
One dollar last bought 5.7430 lira, up 5.1%, its highest level since October, and the euro fetched 6.4860 lira, up 4.3%, also hitting a five-month high.
Elsewhere in emerging-market currencies, the U.S. Dollar
rallied more than 2% against Brazil’s real
nearly 2% against Argentina’s peso
Meanwhile, the Russian ruble
South African rand
and Mexican peso
were all down more than 1%.
“We believe it is particularly alarming for the CBRT [Central Bank of the Republic of Turkey] that [the dollar-lira pair] has continued to nudge higher despite a period of relative market calm and state-owned banks trying to keep the pair anchored,” said Christian Maggio, head of emerging-markets strategy at TD Securities.
In an apparent response, the CBRT on Friday announced the suspension of its one-week repo auctions due to “developments in financial markets”. This hasn’t happened since September last year.
In the central bank’s one-week repo auctions, it repurchases government bonds held by commercial banks at a discount rate, thereby increasing liquidity in the banking system. Skipping the auction indicates a stricter stance on liquidity.
If the repo auctions remain suspended, the weighted average cost of funding in Turkey will rise about 150-300 basis points, or 1.50 to 3.00 percentage points, said Maggio.
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