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ANALYSIS: Is a new earthquake coming in TL?

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At 13:00 TSI, the dollar / TL is trading in the 17.22-23 range, trying to test the 17.40 peak again before the BRSA decision. We do not know why the CBRT, which has adopted foreign exchange stability as its first priority, did not intervene in the depreciation of TL directly or through public banks at these levels. According to the latest data we have, the CBRT has sufficient cash reserves to keep the exchange rate in check. This amount is at least $ 30 billion. In addition, public banks can support TL by generating a short FX position.

We have two possibilities before us. First, the public turns a blind eye to the dollar / TL rise for reasons we cannot resolve. In the second theory, the private sector, whose foreign currency assets have been confiscated, has increased imports. In the latter scenario, it can be assumed that individuals are converting some of the mid-year raises that should be in their pockets or paid early.

Bloomberg, in its news headline “Turkish Industry Group Warns of Financial Crisis for Exporters”, raised the downside credit block on our website. Companies that cannot obtain the necessary loans from Ex-Im Bank for import financing to use in exports could receive foreign currency from the spot market.

According to FXStreet, the new USD / TL target is 17.60. There is also a suspicion in the news that individuals fed up with accelerating inflation are buying foreign currency.

In our opinion, this theory makes sense, but before the party, our people generally exchange their savings for foreign currency and meet their vacation and sacrifice needs. This time the opposite is worrying. Some high net worth investors might buy foreign currency as a precaution, taking advantage of the panic in global markets and the rise in the dollar index.

The scariest scenario is the CBRT’s refusal to use the extremely limited amount of liquid currency assets it left in the intervention by resting with Saray advisors. If the CBRT has developed the thesis that the current account deficit will increase and some maturing foreign loans will be redeemed rather than borrowed again, it could prepare for a balance of payments bottleneck that will have extremely negative consequences for Turkey by saving the foreign currency remaining for the winter months.

These are pessimistic scenarios. In the optimistic scenario the maneuvers of the KKM take place. If the government understands that citizens are demanding a devaluation premium beyond bank interest to stay in KKM, it could reward the depositor by allowing the controlled rise of foreign currency as large amounts of KKM deposits are approaching maturity.

In a similar scenario, an institution like BOTAŞ, which needs a large amount of foreign currency, has been tasked with sourcing part of its needs from the free market rather than CBRT.

The volatility of the currency is at least as dangerous as the constant depreciation of the TL, because it reminds “daily traders” who think they are traders that buying and selling foreign currency will still be profitable. In other words, the fact that the dollar / TL fluctuates 1% or more per day will whet the appetite of those who think they can make a profit with daily trading. Furthermore, any upward movement in the currency attracts companies whose foreign currency assets are effectively frozen and who have to make payments in foreign currency in the short term.

Ultimately, we don’t believe CBRT has stopped defending the TL yet or has taken a long-term position and saved its foreign currency for the winter months. In our opinion, the optimistic scenario is still valid, and after the Bayram the intervention in foreign currency will start again.

However, starting in September, the pressures on TL could become unbearable. There are three main reasons for this thinking. First, we expect a huge winter rally in energy commodities, which continue to sell on fears of a recession. Second, citizens will be afraid of the increasingly tense political environment and will choose to increase their foreign exchange assets. Likewise, attempts by companies to extort foreign currency deposits will at some point cause individual depositors to worry about the future of their own existence. It is an undeniable possibility that these 3 factors will come together and exceed the CBRT’s ability to defend TL before the harsh winter.

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