Thursday, December 29, 2011

Today's Major Market Move: Turkish Lira Weakens 4.6% in December

Back on August 3rd we discussed how the managers of Turkey's economy found themselves in a conundrum. Here's an excerpt:
That chart has to represent a central banker's worst nightmare: a currency that is weakening at the same time that equity markets are declining. It's a financial Sophie's Choice; protect the currency at the risk of crashing the stock market or allow the currency to continue to weaken in an attempt to provide support to equity investors? This one's going to be interesting to watch.
It's time for a little update. Since the beginning of August the Lira has weakened another 13% against the US Dollar and the benchmark while the benchmark Turkish equity index (the ISE National 100 Index) has gained 1.9%. Here's an update of the chart where we compare the two:

Click here to go to the live chart.
This is not what a central bank wants or expects to happen when they devalue their currency; they're hoping for at least some inflation to carry over into equities. Furthermore, imagine what has happened to the price of oil and other commodities in Turkey. A barrel of oil (WTI Crude) priced in US dollars has gone up 12% in 2011. When priced in Turkish Lira, that same barrel of oil has gone up 40% (1.12 * 1.25).

It seems that the Turkish Central bank is shooting in the dark looking for something to reverse the trends and it is creating confusion in the market. They recently announced that they will go from having loan auctions on every day to only staging the auctions on certain days, without much advanced notice.  Here are some comments from traders and market analysts regarding the central bank's actions (from Bloomberg):
-Turkish central bank policy “has spurred confusion and fear,” said Baris Karaayvaz, a trader at Turkiye Garanti Bankasi AS. “We again fail to understand the governor’s comments. The bank says, leave it to me to decide what is an exceptional day. It says, if I do something extraordinary, than it is an exceptional day.”

-“Whenever Basci speaks, he disrupts the market ,” Burak Demircioglu, a trader at EFG Istanbul Securities said in e- mailed comments. “Nothing is clear and this is disturbing the markets. The bank is using tools inconsistent with its statements and this is confusing people.”

-“The central bank taking on such an active role is counterproductive,” Ozhan Antero Atilla, emerging-market analyst at Danske Bank A/S, said in e-mailed comments. “We will come to a stage where foreign markets will not heed Basci’s comments. The bank acts as if it has to do something whenever the lira moves past 1.90.”

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