Endgame for the Lira

By 10/01/2022News

10.01.2022 – The Lira short rocket is likely to ignite its final stage shortly. One blog sees USD/TRY crashing to over 100 as the central bank runs out of foreign exchange to intervene.

ZeroHedge recently commented, “The only question is when will Turkey’s FX swaps stop working – that’s when the lira will reprice from 13 to 100+ in a millisecond.” According to the financial blog, Turkey’s gross FX reserves do stand at $110.9 billion. However, net reserves – the stock minus liabilities – now stand at only $8.6 billion. This means that Ankara has only two to three weeks left before it loses control of the lira.

Mega-inflation and low interest rates

There is no reason for a turnaround. In December, year-on-year inflation jumped to 36.08 percent – the highest level in about two decades. Even the most pessimistic analysts had expected only 27 percent. Producer prices even increased by 79.89 percent in December. No matter -the Turkish central bank lowered under pressure of the Turkish president Recep Tayyip Erdogan the key interest rate. It is now at 14 percent, so investors fled the currency. The USD/TRY rushed down to about 18.

The state takes over currency losses

Ergo, Ankara intervened shortly before Christmas by offering deposit accounts with foreign currency as compensation for lira losses. The government thus assured companies that it would assume exchange rate risks. This is likely to place an enormous burden on the state budget. Target achieved: The lira fizzled upward to $10.6. A painful short squeeze, in other words.

Voodoo monetary policy

Goldman Sachs commented that the deposit guarantee does not address the actual fundamental reasons for the currency’s crash. We add: The reason is Erdoganomics – the voodoo belief that low interest rates support a currency. In addition, a bloated state budget that finances military escapades, for example, via the printing press. Then there is the corona dent in tourism as a foreign exchange earner.

Left pocket, right pocket

At the end of 2021, the Turkish central bank then caused confusion again: It allegedly posted a daily profit of $10 billion. According to Bloomberg, on Dec. 30 the institution had still reported a loss of around 70 billion liras – or about $5.2 billion. A day later, the balance sheet stood at 60 billion in the black. There was no explanation for the sleight of hand. The action was discovered by two opposition politicians, Ibrahim Turhan and Kerim Rota. They assume that the central bank simply sold dollars to the Ministry of Finance. We suspect that an injection of money from China or Russia could also be behind the unexpected turn of events.

Thou shalt not sell lira

Either way, it doesn’t inspire confidence. In the meantime, however, we have returned to around 14. Now, the Turkish authorities now announced that they want to keep a register of everyone who buys large amounts of foreign currency. In other words, selling Turkish lira. According to Bloomberg, the central bank has instructed commercial banks to report all major transactions.
Our conclusion: unfortunately, there is much to suggest that the Turkish lira will become a worthless monopoly. But perhaps this skeptical outlook is just the typical contra-indicator for the turnaround. So if you believe that Erdogan is changing course and that the lira is now gaining, get in now. Bernstein Bank wishes good luck!



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