Last week, the Turkish lira plunged sharply versus the greenback after the central bank found it hard to clarify decisions related to foreign exchange reserves, stoking worries over the health of the nation’s financial situation in the face of the rising threat of further political turmoil.
After plunging nearly 2% on early Thursday, the lira recovered to close with a loss of 1%, recording the largest erosion in the value of a currency in a single day. From a low of 5.3280, the USD/TRY pair recorded a high of 6.3040, before closing at 5.8063.
During the month of March, the central bank made use of short-term swaps with domestic lending institutions to strengthen its aggregate global reserves, which tallied to $28.4 billion at the end of April 12th. Bloomberg’s data suggest the amount owed on these deals was $12.7 billion as of last week’s end. A high ranking central bank representative, speaking under confidentiality, mentioned it was unrealistic to anticipate reserves to vary in accordance with currency swaps.
The sum of money the regulator takes as a loan from banking institutions via swaps appear in its financial statements, but reserve adjustments are the result of broader transactions and activities, the official said.
The vagueness casts doubt over the Turkish asset outlook amongst the political upheaval caused by the outcome of the March election in Istanbul, where Erdogan’s party faced a rout in two major Turkish cities. A sharp drop in foreign exchange reserves in March resulted in the lira’s most significant one day decline since the currency crash of 2018.
Turkish President Recep Tayyip Erdogan said that the country is being vilified by Western media painting the economy as “collapsed, finished.” Irrespective of reports, “our situation is clear,” Erdogan stated while addressing people at Ankara.
This week, Turkey’s High Election Board is anticipated to give its judgment on allegations of swindling by the ruling AKP. CHP party’s Ekrem Imamoglu took charge as the mayor of Istanbul after a controversial triumph, propelling the lira to a higher orbit last Wednesday. During his very first speech after assuming his role, Imamoglu necessitated a quick solution to end the volatility.
Ekrem Imamoglu said “As of now, we’re aware of processes going on. We naturally await some statements on these processes for the peace and happiness of our city and residents.”
Erdogan’s problems will multiply if his party loses Istanbul to the opposition. Unemployment and inflation had a negative effect on the country after the steep fall in the currency value drove the economy into its first downturn in ten years. Outside Turkey, Erdogan struggles to control the backlash from a diplomatic dispute with the US over the country’s intention to acquire a Russian air defense system.
To sort out the matter, the country sent its top officials to Washington last week. The central bank has abstained from officially explaining how the loaned money is factored for in its weekly foreign exchange reserves data, but officials have confidentially recognized the need for transparency.
Over the next year, Turkey has to repay $118 billion of its foreign currency debt. The country solely depends on the central bank’s reserves to clear its debt obligations, in case capital inflow slows down considerably. So far in 2019, foreign investors have withdrawn $1.60 billion from the lira bond market due to the volatile political and economic scenario that shook the country’s financial markets.
Even though there seems to be no fault with the accounting procedures followed by the country’s central bank, a central bank official, who does not wish to be identified, opined that off-balance sheet liabilities should be considered while calculating changes in reserves. The official also said the central bank must make clear its aggregate reserve situation to avoid unwarranted rumors.
In March, JPMorgan Chase & Co. advised its clients to offload the lira, mentioning March’s buffer drawdown. Earlier in April, Moody’s Investor Service opined that the decline was credit negative as the nation’s “very low” foreign exchange reserves shield less than 50% of its overseas payments in the near-term. The steep decline reflects no unprecedented events, a central bank representative who does not want to be identified, said in March.
The Turkish lira is expected to remain weak until clarity emerges about Foreign exchange reserves held by the central bank.
Technically, the USD/TRY pair moves within an ascending channel as shown in the image below. The oscillator of the moving average also has a positive reading. As a result, we are expecting the currency pair to move up in the short-term.
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