Falling Lira Cushioned by Turks Dumping Foreign-Currency Savings

  • Foreign-currency deposits set for biggest monthly drop in 2016
  • Locals still have scope to stem lira drop, Turk Ekonomi says

International investors may be steering clear of Turkey’s lira as the country lurches from one political crisis to the next, but locals are showing no such reservations.

Turkish households and businesses drew down a net $5.9 billion of their foreign-exchange deposits in the four weeks through May 27, set for biggest monthly drop this year, according to data from the nation’s banking regulator. That boosted demand for liras, creating a backstop for the currency at a time of a government bust-up that ended with the prime minister’s resignation, and was seen by strategists as softening what was still the sharpest decline among emerging-European currencies last month.

“If locals hadn’t sold foreign exchange, dollar-lira would be much, much higher,” said Fatih Keresteci, a strategist at HSBC Bank AS in Istanbul, a unit of Europe’s biggest lender. “Local investors offer serious liquidity to the FX market, both when foreign exchange weakens and when it strengthens.”

This newfound appetite for the lira marks a shift in the behavior that helped drive the currency to the weakest on record in September. Turkish bank deposits denominated in foreign currencies rose $13.9 billion this year through the end of April, and have since dropped by more than a third.

Turkey’s currency still fell more than 5 percent versus the dollar in May as President Recep Tayyip Erdogan sought to concentrate power in his own hands, raising concern about the central bank’s independence.

Currency Bellwether

The lira is a bellwether for emerging-market currencies because Turkey’s reliance on capital inflows to finance a current-account deficit makes the nation’s assets sensitive to U.S. monetary policy. The lira surged as much as 1.6 percent Friday to a one-month high of 2.9015 per dollar after a worse-than-predicted U.S. jobs report was seen as virtually wiping out the prospect of a June interest-rate increase by the Federal Reserve. The currency traded 0.2 percent lower at 2.9079 per dollar as of 5:48 p.m. in Istanbul on Monday.

HSBC’s Keresteci expects the lira to stay within a range of 2.9 to 3 per dollar in the short term, while the median forecast in a Bloomberg survey of strategists is for a slide to 3.10 by year-end.

Value Halved

The currency has been weakening since the global financial crisis and has lost more than half its value against the dollar since the end of 2007. After sinking to an all-time low, it arrested its slide as the election of Erdogan’s AK Party in November ended months of political deadlock.

The lira climbed to a six-month high on May 2, which encouraged Turkish residents to cash in and boost their foreign-currency holdings -- a trend that reversed as the lira weakened again in May amid political turmoil.

For local retail investors, the currency’s drop was the first opportunity this year to “sell the dollars they bought around 2.95 per dollar at a profit,” Evren Kirikoglu, a strategist at Akbank TAS, the nation’s largest publicly traded lender, said by e-mail. “For the corporate side, I think they were just smart. Nobody believed that what was going on warranted a currency rate stable around or above 3.00.”

For more on how Turkey’s political woes have disrupted investment, click here.

Foreign currencies still account for 44 percent of bank deposits, largely because the lira has weakened more than people receive in interest on their local-currency accounts, according to Morgan Stanley.

And the economy is struggling as the nation grapples with terrorism and a slowdown in tourism. While 2016 growth is forecast by economists to outstrip the rate of expansion in the neighboring European Union, the shortfall in Turkey’s broadest measure of trade is seen widening to 4.6 percent of output, compared with a surplus in the trading bloc.

The sizable holdings of foreign currencies means local residents still have scope to stem the lira’s slide, said Erkin Isik, a strategist at Turk Ekonomi Bankasi AS in Istanbul.

“Locals still have some ammunition left,”’ he said. “They’ll definitely sell more around 3 per dollar, which would smooth out the sell-off pressure.”

Before it's here, it's on the Bloomberg Terminal.