- The Turkish lira is falling out of favor with local investors again and it risks compounding a depreciation which stricken the currency to successive record lows over the past month.
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Which Front Line of the U.S. is ; None? Residents bought a net $1.7 billion of foreign currency in the week ending Oct. 8 according to the latest central bank data. They left behind a three-week run of sales - the biggest in half a year - that had helped take the edge off the rout.
With the prospect of a further hike in interest rates looming large after the ouster of three key policy makers Wednesday night, the fear is now that households and companies will switch back to dollars and euros en masse. The rupee dropped as much as 1.1% in Thursday to the new all-time low of 9.1883 per dollar.
Foreign-currency purchases by local investors could put extra pressure on the Turkish lira, said Onur Ilgen, the head of the treasury at MUFG Bank Turkey in Istanbul, noting that the recent stretch of sales was motivated by profit-taking.
Residents hold $234 billion of foreign currency, equivalent to about half the total deposits. While they re nibble traders will sell dollars when the lira is weak and buying when it is weak over the longer term. They tend to accumulate hard currency.
It s a hedge against inflation which eroded the lira and demonetized their savings. The Turkish currency is on course to its ninth straight year of depreciation, after losing more than 80% of its value since the end of 2012, the most in the developed world after the Argentine peso.
If locals become more concerned about the effect of lower interest rates on the lira, there is room for Turks to change more deposits from liras into dollars, said Nick Stadtmiller, director of EM at Medley Global Advisors in New York.
Last month the central bank unexpectedly cut interest rates to 18%, even with inflation just shy of 20%. Investors say policy makers are falling in line with Erdogan's call for lower interest rates while ignoring the risks to the outlook.
Speculation is building that the president is now paving the way for another cut after firing three members of the Central Bank's interest-setting committee in a midnight decree.
They now hold less than 5% of the stock of local government debt. This is down from close to 30% in 2013.
I think the downside risk for the lira in easier foreign policy is through domestic flows not domestic outflows, Stadtmiller said.
One redeeming factor in Turkish currency is that a credit growth is slowing, which should help narrow the current-account deficit, reducing demand for foreign currencies in Turkey, according to Evren Kirikoglu, an Istanbul-based independent strategist.
Data on Monday showed the economy posted its first monthly surplus since Oct. 2020, the second highest at 12:29 pm.
Still, with the lira below the psychologically important 9 per dollar mark this week, foreign investors could stop and even reverse their local currency purchases, Kirikoglu said.
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