People do not sell dollars even when exchange rate hits 3.95

The U.S. dollar/Turkish Lira rate eased from 3.90 after a U.S. Federal Reserve meeting and hovered just below 4 liras toward the end of last week. 

The U.S. dollar/lira rate at one point passed the 4-lira mark last week. This trajectory of currency moves created an expectation among market participants that the exchange rate may again move above 4 liras.

It can be argued that those expectations stem from Turkey-related risks rather than global developments. It is feared that hot money outflows may gain momentum and the stability that has been in place for some time may be lost. Given the fact that hot money generally exits Turkey first, not other emerging markets, it is feared that if risk appetite weakens, the pace of the outflow may be larger in Turkey than other emerging markets.

The indicator for the prevailing expectations in the markets is the path the currency rates followed toward the end of last week. It became clear that not only institutional investors but also small savers did not want to sell their dollars at the level of 3.90 or even at 3.95. This suggests that there is widespread expectation that the exchange rates will move above those levels.

Bankers say the price which people are willing to sell the dollars at has increased gradually and that they do not know at what point people would sell their dollars after the U.S. dollar/lira rate exceeds the 4-lira mark. Bankers also note that the amount of foreign currencies people are holding is much higher than before.

It is also likely that if the exchange rate eases to 3.90 and remains at that level for some time, people may want to consider selling foreign currencies they hold. However, a majority of bankers believe that the exchange rate will only rise.

There is no doubt that the high dollar/lira rate annoys not only business circles but also politicians. Almost all ministers are now saying that the rise in the dollar/lira parity is “temporary and the rate will return to its previous levels.” Economy Minister Nihat Zeybekci did not stop there. He even said: “Neither the public sector nor the private sector has any problems with meeting their foreign currency liabilities.” I do not understand why the minister talked about Turkey’s debt repayment, but suffice it to say that bringing such issues up only causes more currency panic.

Customs and Trade Minister Bülent Tüfenkci “warned investors” and called for calm, saying that the exchange rate will return to its previous levels shortly.

Deputy PM Şimşek’s comments 

Ministers probably think they are doing their jobs but we know that statements do not set the course for the markets.

Markets particularly pay attention to what Deputy Prime Minister Mehmet Şimşek says.

Şimşek has said both a global crisis and a crisis in Turkey are looming and we need to be prepared for this.
Would there be any developments — beyond such statements — that may bring about a market correction and help the currency rate drop and stay there permanently? 

A summit to be held in the Bulgarian city of Varna this week between President Recep Tayyip Erdoğan and top EU officials may have an impact on the markets. It has been widely debated for some time that if good news regarding the customs union and visa liberalization come out from this summit, the perception that “Turkey-EU relations are reviving” will gain currency and such a perception, in return, will have positive effects on the markets.

According to information I gathered from diplomatic circles this rather will be a “photo op” summit. Not much should be expected from the summit, but the EU’s 3 billion euro financial aid and praises for Turkey over the handling of the migrant issue. However, busy days lie ahead for diplomacy. Talks with U.S. delegations, a visit by Russian President Vladimir Putin and the Astana summit will be the main political events that may potentially affect the markets in the next two weeks.

To summarize, the dollar gets a battering because of U.S. President Donald Trump’s policies. But the damage he causes pales in comparison with what people do to the plunging lira.