Turkey: the pound approaches the lowest record

The Turkish lira came close to its all-time low on Friday, driven by the flight of foreign investors but dampened by local bargain hunting, a day after the central bank unexpectedly cut interest rates and gave out that little indication of how far it might go.

The currency – prone to strong swings and trailing emerging markets for several years now – weakened 1% to 8.855 against the dollar at 07:49 GMT, near its low of 8.880 set in June.

The pound also plunged on Thursday when the bank cut its key rate by 100 basis points to 18% despite high inflation, providing the stimulus long sought by President Recep Tayyip Erdogan and reinforcing analyst concerns about political interference.

The central bank has provided little guidance on the future direction of policy, but Societe Generale, Barclays, JPMorgan and Goldman Sachs have all said they expect further rate cuts in the coming months.

Yet after years of exodus of foreign funds from Turkish assets, the fate of the lira is largely in the hands of local businesses, investors and savers.

Traders said sales of dollars and other hard currencies by Turks helped limit the depreciation of the pound on Thursday, when businesses and individuals sold between $ 1 billion and $ 2 billion, according to the calculations of four traders. .

“The central bank’s move, which was unexpected to some, put the pound under strong selling pressure. But seeing it as an opportunity, local forex sales of at least $ 1 billion were the main driver. limiting losses, ”said one trader who requested anonymity.

Turks who bought dollars a year ago made a profit of 15%, traders noted. Locals also recovered the lira in March when it plunged after Erdogan sacked a hawkish central bank chief and installed Sahap Kavcioglu as governor.

Kavcioglu started giving dovish signals at the start of the month, paving the way for a cut – although few economists polled by Reuters expected it this month given that inflation hit 19.25% in August.

Foreign investors hold just over 5% of Turkish government bonds, up from over 20% five years ago. Much of the drop is due to double-digit inflation and concerns about the central bank’s credibility, after Erdogan ousted the last three central bank governors over a 20-month period over disagreements policies.

Phoenix Kalen, strategist at Societe Generale, predicted a gradual pace of the pound’s depreciation as Turkish retail investors are very skeptical of the central bank’s willingness to reduce inflation to a 5% target.

“Retail flows now largely determine the price of the currency, not the players in the international market,” she wrote.

“So it comes down to a question of public trust and how quickly that image could deteriorate.”

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