Turkish Lira crashes by 6%, traders expect free-market oriented stance

June 07, 2023 (MLN): Turkiye's lira witnessed the biggest sell-off since 2021, nosediving by 6%, analysts interpreted this move as a “strong signal” that Ankara is shifting from state controls to a currency that is traded freely.

Meanwhile, TRY/PKR currently stands at 15.50/17 in the open market, and 12.409/12.419 in the interbank.

The lira has come under increasing pressure since President Tayyip Erdogan was re-elected on May 28, and stood at 0.04292 against the U.S. dollar on Wednesday (23.12 per USD).

Notably, the currency lost 19.22% of its value against the greenback YTD and by 55% from the high of 2021.

In 2021, Turkish Lira surged by 52% in a single week when the central bank cut its policy rate to 8.5% from 19%. But it marked the beginning of the currency’s crisis from December of 2021 and sent inflation to a 24-year high above 85% last year.

On the other hand, Borsa Istanbul 100 Index (XU100) is near its all-time highs, and has rallied since May 26 of this year by 26.4% without any corrections.

The all-time high of 5704 was made in January of this year, and the index closed yesterday’s session at 5568.

For much of this year, authorities have taken a hands-on role in foreign exchange markets, using up tens of billions of dollars of reserves to hold the lira steady.

The bank's net forex reserves touched a record low of negative $4.4 billion last month, after forex demand surged during the election process, as reported by Reuters.

Four traders said the decline in the central bank's forex and gold reserves had stopped as of last week, and that they could enter an upward trend, along with signs of the change in forex policies.

"There are many regulations and changes that need to be made but the destination we are headed in is becoming clearer every day. We are going towards the lira's value being determined by market conditions," one trader said.

Erdogan announced his new cabinet at the weekend and named Mehmet Simsek, a former deputy prime minister who is well regarded by foreign investors, as finance minister. Simsek later said economic policy needed to return to "rational" ground.

Markets are also waiting for the appointment of a new central bank governor to replace Sahap Kavcioglu, who spearheaded rate cuts under Erdogan's unorthodox policies.

"We are seeing policy normalisation play out," said Tim Ash at BlueBay Asset Management. "I think we are seeing the impact of Simsek pushing (the Turkish central bank) for rational policy."

Another trader said the lira was nearing "expected levels" with sharp intraday losses, adding these would continue for some time. "The lira is getting closer every day to a level that will not need to be defended with reserves," the person said.

Some analysts expect the lira to weaken towards a range of 25-28 per dollar.

Copyright Mettis Link News