TDS: Turkey: Burning reserves and setting the USD/TRY on fire
Goldman Sachs, too, had suggested Central Bank might be forced into monetary tightening if the pressures on the currency continue. Despite a weak currency and a rally in TL denominated government bonds, precipitated by the new rules of the banking regulator BRSA, few foreign investors are willing to take positions in TL assets
The pace of the CBRT’s reserve burn has accelerated in response to TRY weakness. Economists at TD Securities estimate that the CBRT will completely exhaust Net International Reserves this week, reported FXStreet.
“Given the current trend, we estimate that total reserves will be depleted at the latest by the 3rd week of September, at the earliest by the 3rd week of July.”
“Before all buffers are depleted, we think the CBRT will hike rates dramatically and likely introduce tight capital controls. Turkey may also seek multilateral support if this scenario materializes.”
Goldman Sachs, too, had suggested Central Bank might be forced into monetary tightening if the pressures on the currency continue. Despite a weak currency and a rally in TL denominated government bonds, precipitated by the new rules of the banking regulator BRSA, few foreign investors are willing to take positions in TL assets. Bloomberg explains the reason:
The cost of buying protection for the next three months is now more than 11 percentage points above the lira’s historical volatility, near the widest premium in data spanning over two decades. According to Bloomberg data, this popular gauge for valuing an option has been cheaper 99% of the time over the past three years, by far the biggest dislocation among 31 major currencies.
Turkey’s 5 year CDS premium, around 600 basis points, is also the highest among similar Ems, suggesting many investors fear a balance of payments or currency shock.
Despite a weaker Dollar Index, and renewed risk appetite in global markets driven by BoJ bond buying announcement and Europe returning to business, TL weakened further against the dollar, bordering on 6.99 once again. Technical analysts claim state banks are trying to defend 7.00 at dollar/TL exchange rate, though it is not clear what the economic or financial motivation behind the strategy is.
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