With the prospect of another interest rate cut looming after the withdrawal of three key policymakers, the fear now is that households and businesses will revert to the dollar and the euro en masse.
The Turkish lira is once again falling out of favor with local investors and is at risk of deepening a depreciation that has taken the currency to successive record lows over the past month.
Residents bought a net $ 1.7 billion in foreign currency in the week ending October 8, according to the latest central bank data, recording a three-week series of sales – the largest in six months – which had helped to emerge from the rout. .
With the prospect of another cut in interest rates looming after the ousting of three key decision makers on Wednesday night, the fear now is that households and businesses will revert in droves to the dollar and the euro. The pound fell 1.1% to a new all-time low of 9.1883 per dollar on Thursday.
Foreign currency purchases by local investors could put “further pressure on the Turkish lira,” said Onur Ilgen, treasury director of MUFG Bank Turkey in Istanbul, noting that the recent wave of sales was driven by profit taking. .
Residents hold $ 234 billion in foreign currency, the equivalent of about half of all deposits. As they nibble at traders – buying dollars when the pound is strong and selling when it is weak – in the long run, they tend to accumulate hard currencies.
It’s a hedge against inflation that has degraded the lira and eroded their savings. The Turkish currency is on track for its ninth consecutive year of depreciation, having lost more than 80% of its value since late 2012, the most in the developing world after the Argentine peso.
“If locals become more concerned about the effects of lower interest rates on the pound, it is possible for Turks to convert more deposits from pounds to dollars,” said Nick Stadtmiller, director of market management. at Medley Global Advisors in New York.
Last month, the central bank unexpectedly cut interest rates to 18%, even with inflation just under 20%. Investors say policymakers are complying with Erdogan’s call for lower interest rates while ignoring the risks to the outlook.
Speculation is mounting that the president is now paving the way for another cut after sacking three members of the central bank’s interest rate setting committee in a midnight decree.
Which side of the trade residents decide to take over in the coming days and weeks is also important as foreign investors have already left the market. They now hold less than 5% of the outstanding public debt in local currency, compared to nearly 30% in 2013.
“I think the downside risk to the pound with easier monetary policy lies in domestic flows – not foreign capital outflows,” Stadtmiller said.
A buyout factor for the lire is that credit growth is slowing, which should help reduce the current account deficit, reducing demand for foreign currency in Turkey, according to Evren Kirikoglu, an independent Istanbul-based strategist.
Monday’s data showed the economy posted its first monthly surplus since October 2020.
But even then, with the pound breaking above the psychologically important 9 per dollar mark this week, local investors could “stop and even cancel” their foreign currency purchases, Kirikoglu said.