A tough test for the Turkish lira

MDN İstanbul

Meeting minutes released by the US Federal Reserve in late February have had a “cold shower” effect on the markets. Federal Reserve officials say that they see increased economic growth and an uptick in inflation as justification to continue to raise interest rates gradually and they have signaled four rate hikes during 2018

What does that really signify? The Federal Reserve, which in efforts to boost liquidity, has been injecting money into the markets has signalled that it will slow down on this at a rate faster than was previously expected. Following the release of the Central Bank’s meeting minutes, stocks first spiked higher then receded as bond yields jumped, with the benchmark 10-year Treasury note hitting a fresh four-year high. Experts say that US Treasury notes jumping to levels above 3 percent will put to test assets of developing nations and the Turkish Lira. Following the release of the meeting minutes there was an initial hike in bonds and currencies of emerging markets, which, however, eased over time. Yet experts say the rest of the year will likely put the lira and currencies of other emerging economies to a serious test. Although 3 percent  is not an overly critical stage, further hikes in the rate will inevitably have a negative impact on borrowing costs for all emerging markets including Turkey.

Above 3 percent critical for Turkey 

Piotr Matys, an FX strategist at Rabobank in London, said a level above 3 percent in US notes can be attractive for  investors in US bonds. According to Matys, this could support the dollar against currencies of emerging markets. “With US stocks officially in correction territory, the CEEMEA currencies are vulnerable to the prospect of capital outflows from risky assets,” he said.

Erkin Işık, a strategist at the Turkish Economy Bank (TEB) that if 3.02 percent exceeded in US bonds, this could lead to a longer-term distortion, which Işık says might have a stronger impact on interest and exchange rates. However, the math is a bit different on the FX front. Recent data from the Turkish Central Bank on monetary and bank statistics shows that in the week of Feb 9 – 16, the dollar-lira rate fell to 3.75 from 3.84 — mainly owing to an expected normalization in Turkey-US ties — that the total of foreign deposits in banks rose by a significant 4.2 billion dollars.

A detailed look at the statistics show that foreign deposits that belong to local private persons and companies rose by 2.9 billion dollars within just one week. The total rise in this category over the past 3.3 years was 13 billion dollars. According to experts, natives buying foreign currency at a time when international investors are selling creates a disparity. If local investors weren’t buying foreign currency, the dollar-lira rate could have fallen to lower levels, according to the same experts. Such an approach would mean that the fundamental cause of the lira slackening more in comparison with other emergencing market currencies are the purchases of domestic investors. But experts say when the direction of the reverses and some of the currency purchased at this time is resold, this will help limit a possible hike in the dollar against the lira. For some time, the dollar rate has been zig-zagging within the TL 3.7250-3.8400 zone. Domestic investors buy dollars when the rate is towards the lower end of this zone, and they sell only some of what they have bought when the rate reaches towards the higher end. However, figures also indicate that the locals are still net buyers of foreign currency. Foreign investors tend to sell foreign currency as the rate reaches the higher end. Time will show who will win in this currency contest between foreign and local investors.

 

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