December 9, 2021

Turkish Lira Underperforms amidst Currency Rally

On Tuesday, emerging market currencies climbed for the fourth consecutive trade session, as the dollar remained flat ahead of the US inflation data release later in the week. Meanwhile, the Turkish Lira appeared to sit out the rally, as the beleaguered currency did not fare well because of backdoor tightening. It fell by 0.5%, which puts it just 1% away from its all-time lows, as opposed to a rise of 0.2% for the MSCI index of Emerging Market currencies. The central bank in Turkey raised its reserve requirement ratios by 200 basis points for forex deposits. As per this move, the required reserves would increase by $4.6 billion, with the bank trying to encourage people to hold their local currency. 

However, markets overall appeared to be less than impressed. Market experts said that rather than raising benchmark rates, they were supporting the Lira through a monetary policy tightening. Hence, this was affecting the credibility of the Turkish central bank and it was coming off as week. In an environment where inflation seems to be surging in the last couple of months, the Turkish central bank decided to cut its interest rates by 300 basis points because of the increased pressure from President Tayyip Erdogan. This had sent the Turkish Lira tumbling, while most of the other currencies in the market have strengthened and the dollar remains firm. 

On Wednesday, data is expected to showcase an increase in US consumer prices, which could raise the possibility of a quicker tightening, even though the Federal Reserve has made plenty of assurances otherwise. Higher interest rates in the United States tend to reduce the attractiveness of risky yet high-yielding emerging market currencies. It is also expected that data will show Chinese factory gate prices rising in October, which could increase pressure that a nascent economic recovery could be dampened by rising inflation.

Initial sluggishness in the Russian rouble was eradicated with an increase in oil prices. However, the higher volume of foreign currency purchases by the Russian finance ministry meant that gains were limited. Most eastern and central European currencies climbed against the Euro with Poland’s zloty, the Czech crown and Hungary’s forint climbing by 0.2%. On Tuesday, data showed that Hungarian headline inflation had exceeded analyst forecasts significantly, which raised the possibility of banks taking a possibly hawkish stance just like their regional counterparts. Later in the data, the Romanian central bank will push up interest rates by 50 basis points.

The Czech National Bank had hiked up its interest rates last week by 125 basis points, while Poland had done the same by 75 basis points. The Romanian leu remained flat ahead of its central bank’s decision. There was a 0.4% increase in EM stocks, but sentiment remained in check due to carnage in the property sector in China. Downgraded and indebted Kaisa Group announced that it needs help in paying its workers, investors and suppliers. A liquidity squeeze has hit the Chinese real estate sector very hard and troubles of the Evergrande Group appear to have exacerbated it. 

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