Turkey’s Lira Nears Record Low | Finance Brokerage

Turkish policymakers are ramping up their defense of the lira as it edges closer to a record low. This is despite concerted efforts to keep a lid on depreciation on the forex exchange market.

The central bank on Tuesday raised the amount of foreign-currency swaps private lenders can hold on their books. That could be a sign the monetary authority prepares to increase the hard-currency buffer by borrowing more from domestic lenders. This is as state banks continue to intervene on the spot market to prevent the Turkish currency from weakening.

The currency fell for a fifth day to 7.1213 per dollar, extending its loss this year to 16%. In forex trading, it’s all-time low set in 2018 was 7.2362.

Treasury and Finance Minister Berat Albayrak, President Recep Tayyip Erdogan’s son-in-law, prepares to hold a conference call with global investors. While the invitation didn’t specify what he would talk about, he may discuss the currency and the central bank’s reserves.

On Monday, the banking authority further restricted foreign traders’ access to lira liquidity in a bid to deter short selling. Some local banks were asked not to offer any Turkish currency to clients abroad.

The regulator limited banks’ repo transactions, deposits, loans, and other placements abroad in the lira to 0.5% of equity. The measures will stand until the coronavirus pandemic ends, it said.

The Shortage of Lira

The shortage of liras to lend to foreign investors has periodically squeezed offshore funding rates. This forces traders betting against the currency or hedging their exposure to Turkish assets, to exit their positions.

The currency went under pressure amid monetary easing from the central bank. It lowered its main interest rate to 8.75%, taking it below the rate of inflation. For reference, Turkey’s benchmark rate stood at 24% until early July last year.

At the same time, Turkish authorities have sold dollars to slow their currency’s decline on forex. This was making it difficult for foreign investors to trade local assets. State banks sold around $500 million of foreign currency on Tuesday.

Turkey’s state banks have not made any comment on interventions in the FX market.

Last week, central bank Governor Murat Uysal said Turkey isn’t defending any specific currency level. He said that it maintains a floating exchange-rate regime.

In January, he said state banks have been carrying out transactions in line with regulatory limits. They may continue to be active in the currency market.

Turkey’s gross reserves, including gold, have dropped by about $20 billion this year to $86.4 billion through April 24. That was the lowest level since October 2018.

Net reserves excluded some liabilities such as lenders’ required reserves. They were down more than $15 billion, to just over $25 billion.

When money borrowed from local lenders via swaps is stripped out from net reserves, they fall below zero.