Turkey: Central Bank Intervenes in Foreign Exchange Market to Balance TL

Lira appreciates after the Central Bank’s decisions to sell a huge amount of dollars and decrease the rate of required reserves in foreign money. Bigger dollar auctions may follow

The Turkish Central Bank has intervened in the foreign exchange market with a sharp triple move on Wednesday in a bid to defend the value of the Turkish Lira.

The bank sold $750 million at a daily auction, cut required reserve ratios on forex deposits to boost market liquidity by $1.3 billion, and doubled the amount of reserves that banks are allowed to keep in foreign currency to as much as 20 percent of lira liabilities, increasing the Central Bank’s reserves by as much as $3.6 billion.

High-volume auctions may come if necessary in the upcoming days, the bank said on its website, underlying its commitment to supporting a currency that has lost about 18 percent of its value against the dollar this year.

The Central Bank measures triggered a rally in the lira, which gained around 1.5 percent on the day to 1.87 against the dollar after hitting a record closing low of 1.9000 on Tuesday.

Early on Wednesday the bank announced a maximum volume of $1.35 billion in its daily forex auction, finally selling $750 million – by far the most since it launched the sales in August – on bids worth $1.832 billion.

Analysts warned intervention provided a respite but was not a long-term solution.

“In the short term it’s very positive,” Manik Narain, emerging market strategist at UBS in London, said about the high dollar auction. “But from a medium-term view you have to recall that Turkey’s reserves in terms of foreign debt coverage or import coverage are among the lowest in emerging markets.”

Turkey’s record purchase of liras is unlikely to halt declines as the debt crisis in Europe may worsen, said Fokus Yatırım’s Kubilay Cinemre.

The bank’s decision to decrease required reserve ratios of foreign currencies will provide banks with more flexibility in liras, according to Özgür Altuğ of BGC Partners in a written note to investors. “The Central Bank will compensate some portion of the foreign exchange reserve losses via getting more foreign exchange from banks,” he said, adding that the bank may act more aggressively from now on in the foreign exchange market.

October 5, 2011
SOURCE: Hürriyet Daily News