Turkish lira weakens after CB repos resume, FX purchase move

The Turkish lira weakened on Tuesday after the central bank lowered the swap market lira interest rate and held a repo auction for the first time in nearly two weeks, reversing a policy tightening step it had taken to support the currency.

A currency crisis last year wiped nearly 30% off the lira’s value against the dollar and it has fallen further in 2019.

The lira weakened as far as 6.0860 against the US currency after the central bank moves, compared with a close of 6.0315 on Monday. At 1012 GMT, it stood at 6.0500.

The central bank injected 17 billion lira ($2.8 billion) in the repo, the first since it suspended them on May 9. It lowered the lira interest rate in swap transactions to 24% from 25.5%. Bankers said this would gradually lower the average cost of funding by the same amount, to the bank’s policy rate of 24%.

The steps came as investors weighed up Turkey’s banking watchdog decision to impose a one-day settlement delay for FX purchases of more than $100,000 by individuals. Bankers said that move could raise concerns about capital controls.

“The administration seems to be increasingly desperate to keep the lira stable at all costs ahead of the re-run of the crucial vote in Istanbul,” said Rabobank emerging markets forex strategist Piotr Matys, commenting on the forex purchases move.

“Instead of providing investors with a much needed assurance, such measures will have the opposite effect, as the market will interpret it as rising interference in the banking sector.” The decision by election authorities to re-run the Istanbul mayoral vote has fuelled concerns about an erosion of democracy and unnerved financial markets, helping push the lira down another 13% this year. The ruling AK Party’s narrow defeat in the initial election in March was the first time in 25 years that President Tayyip Erdogan’s party or its hardliner predecessors had lost control of Turkey’s biggest city.

Matys said the repo move was a contradictory measure at a time when Turkey needs to restore confidence in the lira.

“Such conflicting policies make Turkey increasingly unpredictable and keep the upside bias in USD/TRY intact,” he added, saying initial resistance was around 6.2282, with a break higher exposing the 6.46-6.50 area as the next potential target. A BDDK watchdog letter sent to banks on Monday said the settlement date for those purchases of more than $100,000 − or equivalent in other currencies − will be the following day.

“This one-day delay on FX transaction for retail investors is curious, especially when they take away the increase in rates in the morning,” said Charles Robertson, global chief economist at Renaissance Capital. “It’s a hint of capital controls, and the threat of more is implicit.” Beste Naz Sullu, of Gedik Investment, said the BDDK was trying to curb foreign exchange speculation, but added that the market “does not like measures such as this much”.

The BDDK said on Tuesday the forex purchases move, effective from Tuesday, aimed to prevent “unnecessary and unjust harm” to the market, particularly by high-frequency traders.

Authorities have recently taken unorthodox steps to protect the currency, including state banks selling dollars. Ankara also raised a tax on some foreign exchange sales to 0.1% from zero last week to discourage Turks converting savings to foreign currencies.

Turks have flocked to foreign currencies in the months since last year’s crisis hit its peak in August, when the lira fell as much as 42% against the dollar.

The lira woes helped tip the economy into recession last year and Turkish Statistical Institute data on Tuesday showed consumer confidence tumbled to 55.3 points in May, the lowest level since the data was first published in 2004. The main share index fell 1.26 per cent.

Turkey has marshalled its state lenders and central bank to curb a selloff in the lira since late March that has threatened to trigger a repetition of last year’s full-blown currency crisis, which tipped the Turkish economy into recession.

The currency lost some 30% of its value against the dollar last year and has shed another 13% this year as investors fret about the threat of US sanctions, uncertainty over local election results, declining central bank reserves and a trend of Turks ramping up forex holdings.

In the days before nationwide local elections on March 31, Turkey directed its state banks to withhold lira liquidity from London’s overnight swap market, a prime venue for investors looking to manage or hedge Turkish positions.

The squeeze lasted only a few days but it sent rates in the market rocketing to a record 1,200% − so high that economists said they were no longer based on actual trading.

Reuters