Turkish lira is taking a massive hit this morning. Turkey's currency is dropping over 5% against the US dollar and euro. TRY slump was puzzling at first as its size was abnormal even for such a volatile asset as lira and there was no news that accompanied it. However, news justifying the move began to surface later on.
Bloomberg reported that Turkish state banks have given up on defending lira. Traders are reporting that Turkish banks halted dollar sales that were aimed at supporting TRY. As a result, an important source of TRY demand vanished and the currency began to freefall.
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However, those news may not be as bad as they look at first glance. Turkish President Erdogan appointed a Wall Street veteran as a new treasury and finance minister - Mehmet Simsek, who is a former Merrill Lynch strategist. Given that FX interventions are costly and they do not bear fruit if there is no confidence in the currency (like it was the case with TRY), the decision to abandon them could be a wise move. Of course, this is only true if Turkish authorities take some other actions instead that could help stem capital outflow. Abandoning interventions and not engaging in any new actions could doom TRY to plunge further.
USDTRY jumped around 15% since the second round of Turkish presidential elections. Source: xStation5
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