Turkey needs ‘proper bazooka’ to prevent new lira lows

Turkey requires currency swaps from the European Central Bank or the U.S. Federal Reserves to prevent the lira from weakening to fresh record lows, exchangerates.org said on Thursday, citing comments from Rabobank.

Possible deals with the Bank of England or the Japanese central bank would provide some support for the currency, but that may not be sufficient, Rabobank said, according to the currency news and analysis website.

The lira dropped to a record low of 7.269 per dollar on May 7, but has strengthened since, partly on speculation among investors that swap deals may be imminent. Turkey needs hard currency to help bolster the central bank’s reserves, which have been depleted in the lira’s defence, and to pay off a stockpile of foreign debt.

“To mark 7.2690 as the 2020 top in USD/TRY, a proper bazooka is required: Turkey would have to secure currency swap lines with the Fed and/or the ECB. Meanwhile, both central banks have reportedly rejected Turkey’s request,” Rabobank said.

Fed officials have signalled this month that Turkey does not qualify for swap arrangements made with several other countries. Political tensions over Turkey’s purchase of S-400 air defence missiles from Russia and a legal investigation of a Turkish state-run bank for flouting U.S. sanctions on Iran also provide potential stumbling blocks to a deal.

Rabobank said a break for the lira to a stronger level than 6.8 per dollar was crucial in signalling whether further gains would be possible. The lira traded down 0.4 percent at 6.81 per dollar on Friday.

Qatar is providing Turkey with an additional $10 billion equivalent in rial-lira currency swaps on top of $5 billion already pledged, the Turkish central bank announced this week. The agreement is a reflection of both countries’ reliance on each other’s political and economic support in regional affairs, Rabobank said.

There is also talk of a possible swap deal with China, but that would require Turkey to make a strong declaration of building closer economic and political ties with China at the expense of relations with the West, Rabobank said.

The decline in the central bank’s reserves and troubles for its tourism industry means Turkey is in serious need of hard cash, said Marc Chandler, chief market strategist at Bannockburn Global Forex, according to exchangerates.org.

 “With little reserves to speak of and a growing trade deficit and the disruption of tourist flows (~12 percent of GDP) and roughly $80 billion in foreign currency debt coming due in three months, Turkey's back is against the wall,” Chandler said.

Rabobank said the currency swaps were no substitute for economic reform, which was needed to bolster the lira in the longer term.  

“Without ambitious reforms - ideally overseen by a foreign independent institution with a high level of credibility – USD/TRY is likely to set another all-time high,” Rabobank said. “FX swap lines can delay this bullish process but will not prevent it.”