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Turkish lira up and volatile amid government support moves

EconomyDec 22, 2021 06:51AM ET
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© Reuters. FILE PHOTO: A money changer holds Turkish lira banknotes at a currency exchange office in Ankara, Turkey September 27, 2021. REUTERS/Cagla Gurdogan/File Photo

By Tuvan Gumrukcu and Nevzat Devranoglu

ANKARA (Reuters) - The Turkish currency was highly volatile again on Tuesday as traders digested measures proposed by President Tayyip Erdogan and the Turkish central bank to guard local currency savings against precisely such swings.

The lira fell as much as 8.6% intraday on Tuesday and rose as much as 18.5% on its second-largest daily range, behind Monday's record swings. It closed the session up 6% at 12.4 per dollar.

One-month implied volatility on the lira, or expected price swings, jumped to the highest on record, reflecting uncertainty about the scheme.

On Tuesday, the Turkish central bank said it will support the conversion of foreign currency deposit accounts into lira deposit accounts to further encourage reverse dollarization.

"In the event that resident real persons, who already had an FX deposit account ... convert their accounts into Turkish lira time deposit accounts will be eligible to benefit from the incentive," the central bank said.

More than half of locals' savings is in foreign currencies and gold, according to central bank data, due to a loss of confidence in the lira after years of depreciation. At its low, the lira was down some 60% on the year.

Erdogan introduced a series of steps on Monday that would shift the burden of a weakened currency to the Treasury and encourage Turks to hold lira rather than dollars. [nL1N2T616D]

The government's initial support for the currency sent the lira soaring some 25% on Monday, albeit in the lowest volume of trading for any day so far this year.

Analysts and bankers warned that if the lira's rally reverses it could further stoke already high inflation and weigh on the deficit.

"Our back-of-the-envelope calculation shows that any extra 12% lira depreciation over the lira interest rate could increase the budget deficit by around 1% of GDP over a six-month horizon," said JPMorgan (NYSE:JPM) analysts in a note.

Finance Minister Nureddin Nebati said on Tuesday that legal proceedings against speculative market comments made on social media were initiated after the recent currency volatility.

"We will never allow such treason," he said.

A source with knowledge of the matter said the Monday measures were decided after the exchange rate hit "problematic" levels, adding that the government would manage the coming period carefully.

"The dollar and euro had risen up to the point of forming a bubble, really. This needed to be intervened in. This situation was not sustainable," the person said, requesting anonymity.

Turkey's five-year credit default swaps, the cost of insuring against a sovereign default, were at 604 basis points after hitting on Monday 622 bps, the highest since May 2020, according to IHS Markit.

Graphic:Lira volatility hits record hit-https://fingfx.thomsonreuters.com/gfx/mkt/gdpzymlxkvw/Pasted%20image%201640076530130.png

WEAKENED BACKDROP

Presidential adviser Cemil Ertem told Reuters the moves had removed the need for individual investors' dollar demand, adding it was "a very important paradigm shift" for Turkey's economy.

While the government called the lira's rebound on Monday a major win on policy, economists have said Erdogan's economic program based on low interest rates is reckless and expect inflation, currently above 21%, to blow through 30% next year.

Turkey's main BIST 100 stock index fell 8% on Tuesday.

Under pressure from Erdogan, the central bank has cut rates by 500 basis points since September. The president has pledged to continue with his low-rates policy.

"The market may be waiting to see how this exchange rate guarantee may play out," said Gary Schlossberg, global strategist at Wells Fargo (NYSE:WFC) Investment Institute in San Francisco.

"Some people think it will stabilize the market for a time, but it just seems that the fundamental backdrop is weak and I'm not sure how long that measure by itself can shore up the market."

Turkish lira up and volatile amid government support moves
 

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Comments (5)
William Cole
William Cole Dec 21, 2021 10:22AM ET
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it's interesting times watching a currency and the people who depend on it edge closer too the end of another fiat currency... but they could back it by gold and silver...Real Money..
David Bradley
David Bradley Dec 21, 2021 9:47AM ET
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Turkey not playing in the Western Central Bank petrodollar.  WCB no like this, but it's tough to drop a bomb on a NATO country!
Jon Bal
Jon Bal Dec 21, 2021 6:30AM ET
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remember in the '00s howard stern had a game on his show "who wants to be a turkish millionaire" ..back when try was about 1M:1.
Abdulnajib Abdulnajib
Abdulnajib Abdulnajib Dec 21, 2021 6:30AM ET
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jon
Tre Hsi
Tre Hsi Dec 21, 2021 6:30AM ET
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pretty soon we can play "who wants to be a turkish billionaire?" on Howard Stern to win $100
John Smit
John Smit Dec 21, 2021 2:21AM ET
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Things are warming up in the kitchen, welcome back volatility my old friend.
DJ Ryte
DJ Ryte Dec 21, 2021 1:35AM ET
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America's future?
Sebastien Baltzer
Sebel Dec 21, 2021 1:35AM ET
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everybody s future.... crypto alternative?
Fly Withme
Fly Withme Dec 21, 2021 1:35AM ET
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California dreaming
Vincenzo Tilotta
Vincenzo Tilotta Dec 21, 2021 1:35AM ET
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Yes if u look at this Turkey crisis it looks exactly like a step-by-step description of what will happen to the USA, starting from the soon-to-happen day that the ROW loses confidence in the dollar
James Johannsen
James Johannsen Dec 21, 2021 1:35AM ET
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it's a lot closer than people want to admit hard assets like gold silver especially silver is not in a bubble to protect yourself
Tre Hsi
Tre Hsi Dec 21, 2021 1:35AM ET
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Vincenzo Tilotta  "the soon-to-happen day that the ROW loses confidence in the dollar"  -- yes that's why the USD index is up by nearly 10% in 2021........
 
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