ISTANBUL (BLOOMBERG) - Turkey's lira plunged to a new record low as the central bank's inertia exacerbates market concerns, fueling a selloff by Japanese investors.
The currency hit fresh all-time lows versus the US dollar, the euro and the yen on Wednesday (May 23), amid a lack of policy maker action to fight Turkey's economic woes. The drop was exacerbated during thin liquidity in Asian hours as Japanese traders cut their losses, though Turkey's stock exchange expressed confidence by converting its foreign-currency assets to lira.
"When retail investors capitulate - as it's been the case overnight when Japanese margin traders decided to cut their mounting losses on their long lira positions against the yen - one could argue that it is a contrarian signal that perhaps the worst is over," said Piotr Matys, an emerging-market currency strategist at Rabobank in London. "But it is crucial that the central bank acts quickly and decisively by announcing within the next few hours that it will hold an emergency meeting due to the latest market developments."
The lira weakened as much as 3.2 per cent against the US dollar, its biggest drop since October, hitting a record low at 4.8203. It traded 2 per cent lower at 4.7641 per dollar by 10.20am in Istanbul. A break below the 24-yen level for the first time on Tuesday led to Japanese selling and pulled down other emerging-market currencies on Wednesday.
There's no economic data that justifies the lira's current depreciation, Borsa Istanbul said in a statement, citing "speculative approaches" before elections next month that it said are aiming to show Turkey's economy in a negative light.
"As an indication of our confidence in the Turkish lira, our exchange's foreign-currency assets, excluding short term needs, have been converted to lira as of today," it said.
Many analysts argue that with the lira's steep decline, the central bank may have to move before a scheduled meeting on June 7 to support the market.
"Only a few weeks ago I would have argued that 200 basis points should have been sufficient, but following such significant depreciation the central bank may have to seriously consider at least a 400-basis-point hike to restore confidence in the lira," said Matys. "Even that may not be enough if Governor Cetinkaya is not fully supported in his attempts to stabilize the currency by prominent Turkish officials."