Critical day for exchange rates

The fever is high on the exchange rates. The Turkish Lira hit a record low against the dollar and the conviction that this will continue is becoming more deep-rooted.

The markets are being pushed further on a feeling of hopelessness in terms of taking necessary measures due to government members’ statements undermining developments in the exchange rates.
Bankers say a decision to be made on Thursday by the Central Bank on interest rates will be very crucial to exchange rates.

In addition, on the same day, the European Central Bank will have a meeting which markets fear might end a bond-buying program as has been rumored for some time.

Some are expecting the bond-buying program to be extended for another six months and that that could ease market liquidity. If, however, the bond-buying program is terminated, the lira is expected to lose value, as will be the case in other developing markets.

Meanwhile, we need to remember that the lira has been falling negatively compared to other developing countries and that the devaluation of the lira has been greater due to vulnerabilities in Turkey.

Therefore, we can say that while the global developments’ influence continues, the actual source of the recent problem concerning exchange rates has actually been caused by the country.

Yet government officials continue to say that this is a transitory situation. Most recently while Prime Minister Binali Yıldırım said, “Don’t look so much to the exchange rates, whatever is happening elsewhere is also happening with us,” President Recep Tayyip Erdoğan also downplayed the statements.

Market manipulators think that the type of rhetoric downplaying the problem is wrong.

A banker, who said that this type of rhetoric is eliminating all expectation in terms of getting the necessary measures, added, “We think they just don’t see that everything will be disrupted if they can’t control the exchange rates.”

The expectation: fall in interest rates to continue

In this framework, bankers will be deeply affected by the decision regarding interest rates due to come on Thursday from the Monetary Policy Committee. We can say in confidence that the market expects another 0.25 percent fall in interest rates. Bankers say it will be wrong to make such a decision with the current situation of the exchange rates, but they still anticipate the Central Bank will go ahead with that decision. 
However, the only institution that said there will not be a drop in interest rates was Goldman Sachs.

“The fact that we do not share the same view as the markets is less about the direction of the monetary policy but more about the Central Bank’s strategy,” Goldman Sachs said.

We hope that the prediction set out by Goldman Sachs will be true and the devaluation of the lira will end.