Turkish central bank spends heavily again to stabilise lira
ISTANBUL, July 10 (Reuters) - Turkey's central bank sold $1.3 billion on Wednesday to prop up the lira as foreign capital that had flooded in earlier this year continued to flee on fears over U.S. monetary policy and domestic political uncertainties.
The move was the second heavy day of intervention this week after a record $2.25 billion was thrown at the lira on Monday, bringing total sales for the year to $6.2 billion. The lira has fallen almost 9 percent against the dollar since May
International credit rating agency Fitch said on Wednesday that any prolonged unrest, following two weeks of protests against Prime Minister Tayyip Erdogan last month, could exacerbate market movements and put at risk the sovereign investment grade rating Turkey achieved in November.
Turkey's banking watchdog, reflecting concern over the recent strong market movements, said it had launched an investigation into foreign exchange deals by lenders.
The country's total net reserves, according to bankers' calculations, are now below $40 billion. HSBC strategist Murat Toprak estimated that Turkey could afford to spend about $10-$13 billion of its reserves in defence of the currency.
"The market is questioning what is going to be the monetary policy option. Their next move should be to hike interest rates, and I expect them to hike the lending rate, the upper end of the corridor.
"But they always use the interest rate tool as the last resort which they use when they have nothing else left."
Emerging currencies have plunged to multi-year or even record lows against the resurgent dollar. This is forcing many central banks to rally to their defence on fears currency weakness will lead to a wholesale exodus of foreign capital from domestic capital markets.
Turkey, its economy having expanded rapidly over the 10-year rule of Prime Minister Erdogan, seems to have borne the brunt of the impact. Erdogan was seen by markets and by critics at home as having badly handled unprecedented protests last month.
Police cracked down hard on an Istanbul protest against a building scheme, triggering demonstrations, often, violent across the country by critics accusing him of authoritarian rule after 10 years in power.
Erdogan blamed the protests on conspiracies of terrorists, international media and "the interest rate lobby", the last reference especially taken by markets as marking a possible change in Erdogan's favourable mood towards business.
Banking watchdog BDDK was seeking details of transactions on July 8-9, senior banking sources told Reuters. They said the BDDK wrote to banks on Tuesday asking for details of auction bids and for what purpose they had bought foreign currency.
The regulator told Reuters in a statement that this was routine practice.
"They sought all information on when forex was bought, at what level and by whom on all transactions of more than $2 million," said one bank executive familiar with the matter.
Two-year Turkish local debt yields soared more than 100 basis points, smashing through the key 9 percent barrier to their highest level in over a year, while Turkey's hard currency debt spreads widened 11 basis points on JP Morgan's EMBI Global index, to 272 basis points over U.S. Treasuries.
Turkish stocks dropped more than 2 percent to 2-1/2 week lows before trimming some losses to stand 1.7 percent down on the day.
The Fitch ratings agency said increased expectations of a U.S. Federal Reserve exit from asset-buying quantitative easing to stimulate the economy, couple with June's protests had exposed the country's chief vulnerability
"A current account deficit equivalent to 6.8% of GDP, over 90% of which is funded by portfolio investors. Turkish asset prices have come under strong downward pressure, precipitating a sharp fall in the exchange rate and declining international reserves.
"Prolonged social unrest, poorly handled, could deter tourism, exacerbate short-term capital outflows, drive-up inflation and damage economic growth, potentially putting Turkey's sovereign rating at risk."