Turkey can handle lira volatility, economists say

USD/lira exchange rate down to 3.81 amid central bank move to cancel 1-week repo auction, after hitting 3.94 on Wednesday

Turkey can handle the recent volatility in its local currency, marked by record lows against the US dollar and other major currencies, according to economists on Thursday.

The US dollar/Turkish lira exchange rate fell down to 3.81 Thursday after the Turkish Central Bank cancelled its usual weekly repo auction.

The move came a day after the exchange rate hit a historical record of more than 3.90 lira to the dollar.

William Jackson, Senior Emerging Markets Economist for Capital Economics in London, told Anadolu Agency that the main drivers behind the recent depreciation of lira were the prospect of tightening monetary policy in the US, as well as the Turkish market’s belief that the central bank would not be quick to raise rates to stem the decline.

“Given the scale of the sell-off, as things stand I think it’s most likely that the [Turkey’s] monetary policy committee will raise interest rates. I had initially pencilled in a small hike at the meeting on Jan. 24, but it’s looking increasingly likely that any hike would be larger,” Jackson said.

London-based economist Timothy Ash, who covers emerging Europe, Middle East and Africa economies for different institutions, said Turkey could successfully overcome the depreciation of lira and related problems through temporary monetary tightening measures.

Ash said the current outlook for Turkish lira could be changed by the central bank via rate hikes only to be gradually reduced to pre-volatility levels, just like it was done in 2014.

According to Christian Maggio, a senior emerging markets strategist at TD Securities in London, the recent volatility is not that extreme, considering the current events both in Turkey and abroad.

“Moves of USD/TRY seem a bit extreme these days, and are definitely magnified by scarce liquidity.

“Not so much, however, in the big picture, considering what is going on in Turkey and abroad,” Maggio said, recalling the emergency rule in the country, and the security issues including Syria, Daesh and PKK.

Falling tourism, rising commodity prices and oil in particular, and the anxiety of markets over the independence of Turkish Central Bank are other factors, he added.

The lira has depreciated by more than 10 percent against the dollar since Jan. 1, raising suspicion of manipulation, particularly as the rate moved in the early morning and late evening when market liquidity is shallow.

The recent fall of the Turkish lira is likely a product of “manipulation”, according to the Turkish customs and trade minister on Thursday.

“There are strong signs that foreign exchange rates are being manipulated,” Bulent Tufenkci told the Anadolu Agency’s Editors’ Desk in Ankara. “There are especially sharp outflows of some funds operating inside and outside of Turkey.

“Both the government and the central bank are closely monitoring the moves.”

Economy experts have also said the fluctuations in the dollar/lira rate seem overly manipulative and do not reflect the genuine fundamentals of Turkey’s economy.