Significant TRY Depreciation
The Turkish Lira has weakened dramatically over the last few weeks moving over 8% lower against the US Dollar over the last month. TRY has been deteriorating over the last few months, however, even by historical standards the recent moves are large and also concerning because they are occurring whilst:
Domestic residents have reduced their foreign currency holdings. In the wake of the failed coup, Turkish households as well as Turkish corporates have supported the TRY. Households have now reduced their FX deposits by around $11.6bln while corporates have reduced their FX deposits by around $2bln.
CBRT has indirectly supplied FX from its reserves. The Turkish central bank stopped its USD selling auctions in April of 2016 and has not yet shown any sign of direct activity in the FX market. However, last year the CBRT encouraged banks to reduce their FX deposits at the central bank by cutting FX reserve requirement rates and adjusting the reserves options coefficients. This action has fuelled an increase in foreign currency liquidity in the domestic market though has also weighed on FX reserve levels.
CBRT Reserve Levels Decreasing
Since November, when the Turkish Lira’s decline began to accelerate, CBRT’s FX reserves have decreased by around $14bln to the end of 2016. The role of gold holdings has played a minor role though reserves excluding gold have fallen $11.5bln over the same period.
The decline in FX reserves is likely due to banks withdrawing their foreign currency from the CBRT. The rapid and sizeable decline in FX reserves should not be overlooked. The facility offered by the central bank is used by regional banks to access foreign currencies, however, there is only a finite amount of FX reserves and a continued decrease in the CBRT’s reserves is certainly not a positive development.
The fall in gross reserves is likely to e addressed by rating agencies sooner rather than later, and the upcoming Fitch review on January 27th might see Turkey downgraded. On January 10th the CBRT announced a further 50bp cut to the FX RRR declaring that this would add $1.5bln to the system. However, more of the same policy, alongside continue FX reserve depletion, is unlikely to fuel a reversal in TRY.
Risks Of Further Weakness
In the CBRTs’ 2017 Monetary and Exchange Rate Policy report the bank noted that the “CBRT will closely monitor FX supply and demand conditions and will take necessary measures to ensure healthy functioning and balancing of the FX market and to support the FX liquidity in 2017 as usual”.
The report also added that “ The CBRT may intervene directly or through a flexible auction in the market, in case excessive volatility and unhealthy price formations occur due to speculative behaviour stemming from a loss in market depth.”
An unhealthy functioning of the FX market is a little tricky to define and so is therefore at the discretion of the central bank. However, we could be moving into the realms of an unhealthy functioning of the market as some figures of authority have recently started commenting on price action claiming that TRY weakness is down to “speculative” pressure.
The main concern is that TRY is rapidly depreciating even though domestic residents’ demand for FX has not increased and the CBRT is supply sizeable amounts of FX from its reserves. If this trend continues then, the CBRT will be forced to employ more aggressive actions to curb the depreciation.
However, even if the bank does intervene directly, it would be unlikely to cause a sustained reversal in TRY. Ultimately, the answer might be a rate hike from the CBRT though if the bank does choose this option, they will have to make sure that the hike is large enough to create a significant change in the
However, even if the bank does intervene directly, it would be unlikely to cause a sustained reversal in TRY. Ultimately, the answer might be a rate hike from the CBRT though if the bank does choose this option, they will have to make sure that the hike is large enough to create a significant change in the behaviour of FX players.
The above chart shows the scale of the advance that USD has made against TRY over the last few weeks and months, with no sign so far of abating. If there is any significant retracement traders can look to the 2015 and mid-2016 broken high as the next key support level around 3.0985-3.0806.