Dubai: Turkey is entering the grips of a full-blown currency crisis.
The lira was already on course for its worst month since 2008 when it plunged to a new record Wednesday, a sign that the central bank’s apparent refusal to step in is giving traders free reign to bet against it. It sank as much as 5.2 per cent.
Policymakers “must hike now,” said Cristian Maggio, the head of emerging-market strategy at TD Securities in London. “There’s no limit to how far this could go because this is becoming a currency crisis.” Eventually, Turks will start selling too, and then there will be “total loss of confidence,” he said.
The lira has fallen on every day but three this month, a sell-off that has accelerated since President Recep Tayyip Erdogan, who has long called for interest rate cuts to fuel growth, said this month he intends to take more responsibility for monetary policy if he wins the June 24 election. Traders are also punishing the nation for failing to do enough to combat double-digit inflation and a widening current-account deficit.
The lira’s 21 per cent loss this year, the second worst in emerging markets, is close to exceeding the decline in Argentina’s peso. The projected carry return on the lira, based on the interest-rate differential adjusted for funding costs and expected swings, plunged to the lowest since January 2017.
Even Japanese margin traders, who until recently were doubling down on their Turkish bets, have been cutting their losses.
Borsa Istanbul, the nation’s stock exchange, said there’s no economic data that justifies the lira’s depreciation. It attributed the decline to “speculative approaches” aimed at putting Turkey’s economy in a negative light.
“The exponential development of lira exchange rates is the obvious symptom of a currency crisis,” Ulrich Leuchtmann, a Frankfurt-based analyst at Commerzbank AG, said in an emailed report. “Of course the government refuses to acknowledge the facts at this point of the crisis. That is part of the usual development of such a crisis.”
The lira retreated 3.4 per cent to 4.8349 per dollar as of 10:23am in London. Its implied volatility over the next month soared to the highest in nine years, eroding the currency’s appeal to arbitrage traders.
The benchmark Borsa Istanbul 100 Index declined 1 per cent, led by a 3.7 per cent drop in Turkcell Iletisim Hizmetleri AS. The yield on the nation’s bonds due 2028 climbed seven basis points to 7.4 per cent.