Turkish lira threatens to breach key resistance on politics

(Updated with Albayrak's cancelled meeting in fifth paragraph)

Turkey’s lira fell, threatening to break through a key level of technical resistance, after concern about political stability and the level of the central bank’s foreign currency reserves increased.

The lira dropped as much as 0.7 percent to 6.1982 per dollar in Istanbul on Wednesday, just short of the 6.2 per dollar that traders say is a critical level for the currency before it slides further.

The lira is declining after a decision by the Turkish authorities to re-run a March 31 election for the mayor of Istanbul, won by an opposition politician but then controversially disputed by the ruling Justice and Development Party (AKP). The central bank’s foreign currency reserves are also in sharp decline and some companies are struggling to repay their dollar debts, adding to investor concerns.

The lira has slid almost 15 percent against the dollar this year, more than half last year’s 28 percent decline, when the economy went through a currency crisis.

On Wednesday Reuters reported that Turkey's Finance and Treasury Minister, Berat Albayrak, had cancelled a planned presentation on rebalancing the economy. Economists quoted by Reuters expressed fears the election rerun would delay long-awaited economic reforms.

In a report on Wednesday, ABN Amro economist Nora Neuteboom warned that the lira was exposed to further weakness due to domestic political tensions, an argument with the United States over the planned purchase of S-400 missiles from Russia, and central bank policy, which she said meant that net foreign currency reserves, excluding currency swaps, had fallen to just $11 billion.

“Turkey cannot afford to deplete its reserves further by defending the currency,” Neuteboom and ABN currency specialist Georgette Boele said in a report. “As investors are well aware of this fact, a little spark in, for example the tensions with the U.S., could easily trigger another lira sell-off.”

Two Senate bills related to Turkey’s detention of U.S. citizens and a new security arrangement for the eastern Mediterranean, which will exclude Turkey, also risk raising political tensions between Ankara and the Washington, Neuteboom said.

U.S. President Donald Trump imposed economic sanctions on Turkey last year for its detention of American pastor Andrew Brunson on terrorism charges. One of the Senate bills calls for new sanctions and U.S. politicians have warned that the July purchase of the S-400s could also spark financial reprisals.

The lira is also falling as Turks flee the currency due to meager returns from bank deposits. Interest rates on lira deposits have only just exceeded inflation of almost 20 percent.