Lira extends the week’s rally backed by Turkish state banks | The powerful 790 KFGO
By Nevzat Devranoglu and Ezgi Erkoyun
ISTANBUL (Reuters) – The Turkish lira rallied again on Thursday and was on track for its best week in two decades, boosted by a government plan to protect some deposits and additional support from state banks aggressively selling dollars.
The pound rose 10% to 10.25 against the dollar, its highest level in a month, before cutting most of those gains to trade at 11.395 at 1444 GMT.
The currency returned from a historic low of 18.4 on Monday as it was down around 60% on the year, ending a week of record volatility and intraday swings.
Despite the rebound, risk measures are near all-time highs as questions remain about the state’s anti-dollarization plan, which could further fuel inflation, raise public debt and eat away at foreign exchange reserves if the lira starts to drop again.
Echoing past interventions, four sources told Reuters that Turkish state-owned banks sold dollars massively this week after President Tayyip Erdogan announced that the government would guarantee certain deposits against depreciation losses.
A source said Monday and Tuesday’s interventions totaled $ 3 billion. The sale coincided with a decline in the central bank’s foreign exchange reserves, which a second source said stood at $ 6 billion for those two days alone.
The three big state banks – Ziraat Bank, Vakif Bank and Halk Bank – did not immediately comment on any interventions. The central bank was not immediately available for comment.
The central bank’s balance sheet suggests that $ 5.5 billion of Monday and Tuesday’s drop in net reserves is due to sales of foreign exchange, said Haluk Burumcekci, director of Istanbul-based Burumcekci Consulting.
Reflecting the market’s nervousness, the cost of insuring against a sovereign default using CDS exceeded 600 basis points earlier this week, before falling back to 593, still near all-time highs, according to IHS Markit.
THIN RESERVES PAD
In 2019-2020, the central bank supported, via swaps, the sale of some $ 128 billion via state banks to stabilize the lira, depleting Turkey’s foreign exchange reserves. Earlier this year, sales became the subject of what the political opposition calls government mismanagement.
To deal with the latest turmoil, the central bank this month announced five direct market interventions that bankers say total between $ 6 billion and $ 10 billion. He made no notice of intervention this week.
Official data shows the bank’s net foreign exchange reserves fell to $ 12 billion last week, from $ 21 billion a week earlier, as the interventions weighed in.
Seeking to strengthen its buffer, the central bank is concluding talks with counterparts in Azerbaijan and the United Arab Emirates over a possible currency swap line and a deal is likely before the end of the year, separate sources told Reuters .
On Monday, President Tayyip Erdogan announced a series of measures that would shift the burden of a weakened currency to the treasury and encourage Turks to hold lire rather than dollars. The central bank will support the lira converted into hard currency.
More than half of residents’ savings are in hard currencies and gold, official data shows, due to loss of confidence in the lira after years of depreciation and erosion of central bank credibility .
Under pressure from Erdogan, the central bank has cut rates by 500 basis points to 14% since September.
The president pledged to continue his low rate policy despite widespread criticism, while opposition parties called for immediate elections following the currency collapse.
Wall Street Bank JP Morgan said markets were expecting a big reversal in monetary policy and anticipating a 16 percentage point hike in Turkey’s key interest rate over the next year.
Chart: Market prices in the wake of Turkish rate hikes next year https://fingfx.thomsonreuters.com/gfx/mkt/gdvzymxxlpw/Pasted%20image%201640255443242.png
Graphic: The Erdonomics effect https://fingfx.thomsonreuters.com/gfx/mkt/dwvkrzxozpm/Pasted%20image%201640257543003.png
(Additional reporting by Marc Jones; Editing by Jonathan Spicer and Toby Chopra)