News & analysis

Despite the Central Bank of the Republic of Turkey’s (CBRT) best efforts, the lira’s breach of the 7.00 level against the dollar last Friday has been extended past its 2018 crisis low in this afternoon’s session. The lira briefly touched an all-time low of 7.1957 this afternoon, against a broadly firming dollar, as Finance Minister Albayrak attempted to calm investors nerves over a conference call. 

With the greenback is surging across the board as US yields rise on a swathe of new issuance, the CBRT’s problems are only being exacerbated. The lira’s slide past the 7.00 level on Friday raised questions over the sustainability of the CBRT’s unofficial actions in trying to defend against another serious bout of currency weakness. Turkey’s gross reserves, including gold, fell by around $20bn this year to $86.4bn, data up until April 24 show, while net reserves, which excludes lenders’ required reserves, are down more than $15bn to just over $25bn.

Anecdotal evidence from people familiar with the matter suggests that the CBRT sold $1bn in foreign currency today while selling around half that on Tuesday.

Stripping out borrowing from local lenders via swap instruments, it is estimated that Turkey’s foreign reserves are depleted to a level which can no longer support aggressive currency intervention, fuelling its slide to record lows this afternoon. Such unofficial metrics have implicitly been confirmed by authorities recent actions.

Lately, the CBRT has raised the limits for FX swaps that private lenders can have on their books from 30% to 40% of their so-called FX Market Transaction Limits.

This increases the amount of USD liquidity the CBRT can obtain from domestic banks, who have a natural USD deposit base, in return for lira access – this is a key short-term USD funding mechanism for the central bank. Additionally, yesterday Turkey expanded its bank on foreign investors’ access to lira liquidity. By limiting bank’s repo, depot, loan and placements abroad in lira terms to 0.5% of their equity, offshore liquidity conditions have tightened substantially. This has helped defend the lira in the absence of the CBRT being a large net buyer in the market.

Albayrak’s call to investors at 4 pm local time (14:00 BST) lasted a staggering 60 minutes as he tried to dispel the narrative that the central bank has run out of reserves and that its recent actions counteract those normal under a free market system. Albayrak said the current measures have been introduced in the interests of liquidity management and to stop avoid actions in swap and derivative markets spilling over into currency pricing, thus destabilising the central bank’s mandate financial and price stability. Albayrak confirmed that Turkey are in continuing talks with G20 nations and major trading partners over swap access as questions arise over their ability to finance a large external debt position. In response, the Federal Reserve’s Barkin said the US central bank already has swap facilities in place with countries that provide “mutual trust”, suggesting assistance won’t be forthcoming from Washington any time soon.

Taken together, we now expect more extreme actions to dry up liquidity and shore up investor confidence in the currency to occur in the coming days.

Whether this takes the form of unofficial guidance by authorities to state banks to stop liquidity provisions completely or the more conventional route of interest rate hikes is yet to be seen, but with Turkey’s real rates sitting in negative territory and the inflationary effects of a weakening lira mounting the possibility of the CBRT unwinding recent cuts is rising.

 

Graph: Lira slides past 7.00 as offshore liquidity dries up – forcing hedging costs to rise

 

Graph: CBRT could be forced to reverse much of its policy easing as inflation trajectory rises with currency weakening

 

 

Author: Simon Harvey, FX Market Analyst
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