Turkish Lira Up 29% Against British Pound

  • TRY Reduces Three-Month Losses by 50%
  • By punishing the holiday market squeeze on sellers
  • TRY deposit system overwrites USD / TR, GBP / TRY
  • May support TRY more if dollarization reverses
  • GBP / TRY close to 17.00 and USD / TRY to 11.00

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The lira had reversed more than half of a punitive multi-month liquidation Tuesday after the government introduced a new depositors’ savings plan that could have the potential to reverse the currency crashing trend of the ” dollarization ”in the coming months.

The Turkish Lira saw a rapid and relentless rally that saw the USD / TRY and GBP / TRY tumble triple-digit percentages in thin and possibly illiquid holiday markets following the introduction of a new government savings program.

Turkish savers, including businesses and households, will now be able to use special accounts that protect the value of lira-denominated savings by paying compensation for excessive exchange rate volatility through an adaptable interest rate.

“The aim of the program is to stop consumer demand for hard currencies like USD and EUR,” explains Bas van Geffen, CFA and strategist at Rabobank.

“Government finances are now even more tied to the performance of the currency, which could exacerbate shocks if credibility risks materialize. So despite the miraculous resumption of after-hours trading, the verdict is still not established if this stops the bleeding from TRY, ”Rabobank’s van Geffen also said.

TRY daily

Above: USD / TRY and GBP / TRY displayed at daily intervals with summer rally Fibonacci retracements indicating likely areas of technical support.

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The rally in the pound after the new schedule was announced reversed more than half of the USD / TRY’s increase from 8.28 in early September to over 18.37 earlier in the week, while the rate of pound-to-pound exchange had fallen to nearly -30. % by Tuesday.

Holders of an “Exchange Rate Protected TL Term Deposit” will receive the difference between the interest rate of the Central Bank of the Republic of Turkey and any negative change in the value of the exchange rate, in addition to the CBRT interest rate.

It is hoped that the new regime will discourage businesses and households from storing their wealth in foreign currency deposits rather than lira deposits, the regular conversion of which has been identified by analysts and economists as a major pressure on the strongly lira. depreciated.

“The share of currency deposits in total deposits is already around 56%,” warned Murat Toprak, CEEMEA FX strategist at HSBC, in an October note.

HSBC TRY dollarization

Source: HSBC.

“With the current level of inflation above the nominal interest rate and rising inflation expectations, the real and expected deposit rates of households and businesses could fall further and increase demand for foreign currency,” also said Toprak and his colleagues.

Some estimates suggest that more than half of Turkish bank deposits are now held in foreign currencies as a result of repeated and almost annual periods of double-digit depreciation of the pound over a long continuous period.

As a result, and although the rally in the lira has already been strong, a further rebound in the currency cannot be ruled out should the new regime gain traction among Turkish households and businesses.

The lira was on track during one of its worst years on record following a series of CBRT interest rate cuts in the last quarter, which took place against a backdrop of inflation. high and growing and which the market perceived to have been designed by President Recep Tayyip. Erdogan.


Above: USD / TRY and GBP / TRY displayed at weekly intervals.

“With soaring inflation and falling nominal interest rates, the real interest rate is gradually sinking into negative territory, prompting bond investors to continue reducing their positions ($ 34 million d (bonds sold by foreign investors in December), “said Lysu Paez Cortez. , strategist at Natixis.

The recent depreciation of the pound was the unorthodox interest rate policy of the CBRT, which reduced its cash rate from 19% to 14% in the face of double-digit inflation rates and apparently under pressure from ‘Ankara.

It emboldened speculators who had increasingly bet against the Turkish currency and with growing confidence in recent months, as the pound’s losses hit a crescendo in December after President Erdogan presented details of the new strategy. government economy.

Erdogan said in an interview with TRT Haber that Turkey would no longer court “hot money” through high interest rates and instead attempt to grow economically by expanding its export sector using, between others, low interest rates.

“For now, the main risk that has materialized is an acceleration in inflation, which exceeded 20% yoy in November, in turn eroding the purchasing power of Turkish households. The pass-through effect of the pound’s depreciation could push inflation to around 30% in Q2-22. The very real impoverishment of the population has led the government to announce a 50% increase in the minimum wage, ”Cortez de Natixis also said this week.

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