High rate helps dollar rate

MDN İstanbul

In spite of increasing political tension globally and growing geopolitical risks, coupled with adverse domestic political and economic developments, the dollar lost steam against the lira at a rapid pace, falling to TL 3.49 at the end of August, its lowest in two months

Experts say the dollar rate is likely to slacken further, down to TL 3.47. Borsa Istanbul has been also continuing its rise in spite of the general sell-oriented situation in global stock exchanges. But what exactly has contributed positively to Turkish markets in spite of all the risks in place? To answer the question, let us take a look at the “big picture.” Concerns that US President Donald Trump will fail to pass critical legislation to help the economy and tension with North Korea formed a series level of pressure on global markets, especially in the second half of August. US stocks retreated to the lowest levels in the past month. On Aug. 10, the Vix volatility index – which is also called the ‘far index’ and  reflects the expected US stock market turbulence implied by option prices – jumped above the 15 per cent mark for the first time since late June. Buyers flocked to gold and US bonds. In spite of all this,  global markets haven’t yet seen a major wave of sales. Experts say the reason for this is the ultra-loose FED policy, which prevents risk appetite from falling. As such, developing markets stood strong amidst nervousness and risks from Trump and North Korea. 

Festive feeling in the air

As stated earlier, Turkish financial markets are looking unexpectedly optimistic. The dollar has gone down to TL 3.50 — an important psychological threshold–; Borsa Istanbul is nearing 110,000 points; the compound interest for 10-year bonds have retreated to as low as 10.73 percent. Normally, experts say, some sort of concrete positive news or developments should precede such a situation in the market. Not only that there hasn’t been any great news, things have been going unwell as recent tensions between Turkey and Germany might hurt Turkey’s ties to the EU. Bankers note that demand for debt tenders of the Treasury is strong; highlighting that interest towards Turkish bonds has recently been high. The fundamental reason behind this attraction, bankers say,are the relatively high interest rates Turkey offers. However, behind the high rates are risks faced by Turkey. Analysts say that abundance of global liquidity keeps the investors from seeing those risks. When liquidity in global markets shrinks, these risks will eventually become visible, they note.

The Eid-al-Adha, a religious holiday, will be a 10-day official holiday in Turkey, which  might be linked to the lower rate of the dollar and the overall optimism in the markets. Experts  say that the lengthy holiday offer investors a good period for benefitting from the high interest rate on the lira. Bankers note that a short dollar/TL position in would offer approximately one kurus worth of relative interest income over a period of ten days. Another reason for the loosening in the dollar-lira parity is that many Turkish companies have put their activities on hold for the holidays. Others have also relaxed; as is the case for most businesses in summer. In the foreign exchange market, the only buyers were companies due to their import debts and debts in foreign currency, bankers say, adding that the absence of these buyers foreign currency sales by foreign investors might have helped the lira. In the recent months, there has been a large significant influx of foreign investors, but there has also been strong demand for foreign currencies locally. This was the main reason why the dollar-lira parity got more or less stuck around 3.50-3.55. Bankers say that the lower dollar rate offers buying opportunities for establishments in need of foreign currency; noting that higher demand will likely push the dollar up again after the holidays.

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