Burst of selling hits Turkish lira after two steady months

Credit: REUTERS/DADO RUVIC

Turkey's lira sank 1.4% to its lowest since mid-May on Tuesday, as pent-up selling pressure burst through, ending what analysts called two months of calm engineered by costly state interventions.

By Jonathan Spicer

ISTANBUL, July 28 (Reuters) - Turkey's lira sank 1.4% to its lowest since mid-May on Tuesday, as pent-up selling pressure burst through, ending what analysts called two months of calm engineered by costly state interventions.

It was the lira's worst day since early May when it hit an all-time low, and the selling followed a brief plunge in light overseas trade late on Monday. After a volatile day, it was worth TRYTOM=D3 6.955 versus the dollar at 1626 GMT.

Tatha Ghose, analyst at Commerzbank, said there had been a semblance of "a managed exchange rate" until this week.

"The central bank and state banks may have reached their limit in terms of capacity to intervene," he wrote. "If so, the exchange rate could jump by a large amount once such a hard limit is breached."

Data and sources show the central bank and state banks have sold billions of dollars to keep the lira stable, and traders calculate these interventions amounted to some $100 billion since they began early last year.

While the currency remained range-bound for two months, concerns have simmered over Turkey's depleted reserves, high external payment obligations, rising current account deficit, stubborn inflation and deeply negative real rates.

The government has said the central bank may intervene to stabilise the currency and the bank itself has said reserves will fluctuate in extraordinary times such as during a pandemic.

Istanbul's main stock index plunged 3.6% in its worst day since coronavirus fears gripped global markets in March. A lira volatility gauge hit its highest in a month, dollar-bonds fell and CDS insurance against Turkish default jumped.

Two years ago concerns over central bank independence and a diplomatic dispute with Washington triggered a currency crisis that tipped Turkey's economy into recession. This year, coronavirus fallout is expected to shrink the economy again.

The FX interventions have helped cut the central bank's gross FX reserves to $49 billion from $81 billion this year, prompting Ankara to search for foreign funding sources.

The central bank will have burned though its gross buffer as soon as late summer unless alternative funds are found or interventions are halted, said Cristian Maggio, head of EM strategy at TD Securities.

While interventions have targeted the U.S. exchange rate, the lira has neared a record low against the euro.

"Given the level of state bank intervention on a regular basis, it is hard to say the (lira) is a floating currency (and) is now a heavily managed exchange rate," said Tim Ash of BlueBay Asset Management.

(For a graphic of lira's two-day slide, click: https://tmsnrt.rs/30VzxZV)

Turkish lira vs U.S. dollar https://tmsnrt.rs/30VzxZV

Turkish lira nears record low vs euro amid risk of further EU sanctions

(Reporting by Jonathan Spicer; Editing by Ed Osmond and Barbara Lewis)

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