Turkish lira weakens despite CBT increasing USD supply in market

Yesterday, the Turkish lira depreciated against the USD again to a new low even as the Central Bank of Turkey attempted to stem the tide by raising USD supply in the market. Regular FX auctions were used by the previous MPC, selling U.S. dollar from its reserves to banks, in order to keep the banking system supplied with FX.

The new Monetary Policy Committee has been undertaking a similar strategy, but by adjusting its reserve option coefficients that influences the degree to which banks maintain part of their lira required reserves in FX, noted Commerzbank in a research report.

“Yesterday's 0.1-0.2pts cut to this coefficient, across two different tranches, will release an estimated $700mn to the banking system”, added Commerzbank.

But, just as the earlier FX auctions did not have any marked difference on the Turkish lira’s trend, these reserve option adjustments that have been conducted in the last six months have not had much of an effect either. The latest central bank data indicates that foreigners sold almost USD 1 billion in Turkish bonds and stocks in last week alone. According to Commerzbank, modest liquidity management tools would not have any impact in the broader risk off mood set off by the re-pricing of global bond markets.

The Central Bank of Turkey seems to have some tools to stem the tide as it has laid down its main insurance policy.