by Andrew Moran
Friday September 18, 2020
The Turkish lira plunged to a new record low against the US dollar to finish the trading week, adding to its year-to-date plunge to 28%. The lira joined the broader emerging market currency selloff as the Federal Reserve’s downbeat assessment of the world’s largest economy sent investors into safer assets. Could the lira next test 8.0 against the buck?
On Thursday, state-owned financial institutions sold approximately $500 million in global foreign exchange markets to help stop the lira’s hemorrhaging. But it was not enough to prevent the lira from crashing to another record low for the third time this year.
Analysts are recommending the central bank to tighten monetary policy, asserting that it is too loose to support the lira. With inflation hitting 12%, experts are urging the central bank to raise interest rates at next week’s Monetary Policy Committee meeting. Although the organization has refrained from hiking the benchmark interest rate, it has kept the repo rate at 8.25%. This has pushed the weighted-average cost of funding to 10.32%.
It was also reported that the central bank added to its foreign exchange reserves in the week ending September 11, from $44.88 billion to $45.281 billion. Despite the modest increase, the total is still immensely below the $80 billion figure at the start of 2020. Forex reserves stand at their lowest levels since November 2005.
Meanwhile, the US central bank presented a bearish view on the economic outlook, leaving interest rates at near zero until 2023 and urging the Congress to apply additional fiscal stimulus. Republicans and Democrats are currently debating a $1.5 trillion COVID-19 stimulus and relief package. The Fed reiterated its position that containing the coronavirus pandemic is paramount to supporting the economic recovery. The peak Fed stimulus impacted financial markets, leading traders to ditch riskier bets and into safer assets.
When this is the trend in the broader financial market, emerging market currencies, such as the lira, the Indian rupee, and the South African rand, get impacted the most.
The USD/TRY currency pair advanced 0.34% to 7.5758, from an opening of 7.5500, at 17:27 GMT on Thursday. The EUR/TRY rise 0.45% to 8.9854, from an opening of 8.9446.