Turkish lira weakens for 8th day beyond 15.6 vs dollar

A merchant counts Turkish lira banknotes at the Grand Bazaar in Istanbul, Turkey, March 29, 2019. REUTERS/Murad Sezer

ANKARA, May 16 (Reuters) – The Turkish lira slid 1% to beyond 15.65 against the dollar on Monday, slipping for an eighth consecutive session towards the record weak levels it hit in December after a series of interest rate cuts, while a key measure of risk hit a record high.

The currency weakened as far as 15.6605 before edging back to 15.595 by 1235 GMT. It has lost 16% of its value against the U.S. currency this year after a slide of 44% in 2021.

The war in Ukraine began to exert pressure on the lira in March as Western sanctions on Russia sent energy prices soaring, pushing up Turkey’s already hefty import bill.

Illustrating the pressures, Turkey’s current account deficit in March widened to $5.554 billion, central bank data showed on Monday, exceeding a Reuters poll forecast of $5.371 billion.

Turkey’s 5-year credit default swaps (CDS), the cost of insuring against default, hit a fresh record high of 718 basis points on Monday, up 8 points from Friday’s close, IHS Markit data showed.

Meanwhile the premium demanded by investors to hold Turkey sovereign hard-currency debt over safe haven U.S. Treasuries rose 7 basis points to 607 basis points – the widest since mid-March, JPMorgan’s EMBI Global Diversified index showed.

Five traders told Reuters the exchange rate was seen in a 15.5-16.0 band going forward and they would watch outwhether authorities defend the level of 16.0 against the dollar.

“We have not seen attempts to stop the depreciation at the 15 and 15.5 levels with state forex sales,” said one trader.

“Between 15.5-16, balance can be achieved for the short term, but the lira may still need to depreciate if no new external resources are created. This policy is not sustainable in the long term.”

Istanbul Analytics, a research platform, said in a note that a period had begun in which central bank reserves, by a very rough estimate, will melt by $7-10 billion a month, even excluding currency interventions. That is set to keep central bank under pressure to continue repleting them via exporter income purchases and other methods.

It said there was a “very high probability of a currency shock” similar to the one in December within two months or the announcement of capital controls within a month.

Market participants have in the past voiced concerns that capital controls might be introduced as in previous currency crises, however Turkish officials have denied considering such actions.

DEFICIT WIDENING

Piotr Matys, senior FX analyst at In Touch Capital Markets in London, said the widening of the current account deficit driven by energy imports cast doubt over Ankara’s inflation-fighting plans.

“The government notion and the central bank notion that Turkey will be able to bring inflation lower in coming quarters if current account deficit narrows is being put into a major test as current account deficit moves in the wrong direction.”

The currency crisis last year was triggered by an aggressive easing cycle that President Tayyip Erdogan sought despite rising inflation. That, along with the war fallout, pushed inflation to 70% in April.

Additional reporting by Karin Strohecker in London,
Writing by Daren Butler and Ece Toksabay;
Editing by Emelia Sithole-Matarise and Tomasz Janowski

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