USD/TRY Flat in Aftermath of Turbulent Week

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The Turkish lira is trading relatively flat against the US dollar following a turbulent week that saw the currency crater to a record low. Despite several policy shifts by Turkey officials, forex analysts are warning that the lira could see fresh lows for the rest of the year. But has Ankara plugged the holes in a sinking ship, or is the country’s collapse just getting started?

On Friday, the central bank tightened monetary policy that allowed the lira to retreat from its all-time low against the greenback. The Monetary Policy Committee (MPC) ceased funding local lending from its one-week repurchasing rate, a move that would force financial institutions to borrow from the more expensive overnight window. Market observers warn this could lead to a 150-basis-point hike in interest rates.

But President Recep Tayyip Erdogan revealed in a televised speech that he wishes to see additional rate cuts rather than the necessary rate increases. He believes that higher borrowing costs boost inflation, an idea that defies economic logic and contributed to Turkey’s financial crisis in the first place. The central bank may have no other alternative but to adhere to the policy recommendations of Erdogan since he terminated the last head of the MPC in June 2019 because he did not follow through on easing.

The next time the MPC meets will be at the end of August, so all eyes will be on the meeting to see what policymakers will do.

Ankara continues to see a drop in foreign exchange reserves, falling to $46.67 billion in the week ending July 31. This is down from $50.93 billion in the previous week. The central bank has been unloading its foreign reserves to prop up the lira, selling as much as $94 billion since March 2019.

The poor conditions in Turkey are leaving analysts bearish on the country and the currency. Barclays anticipates the lira to top 7.50 per dollar, while Goldman Sachs forecasts deeper depreciation over the next 12 months. By July 2020, Goldman sees the USD/TRY hit 8.25, from the previous estimate of 8.

In other data, Turkey’s unemployment rate edged up by 0.1% in May to 12.9%.

The USD/TRY currency pair dipped 0.04% to 7.2900, from an opening of 7.2941, at 18:41 GMT on Monday. The EUR/TRY tumbled 0.36% to 8.5647, from an opening of 8.5979.

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