Will the exchange rate reach an interest rate intersection?

For the past 4 days, we have witnessed the exchange rate of the dollar being stuck in the range of 23.50-23.70 Turkish lira. Every upward movement is followed by a return to the range. This situation is drawing the attention and arousing curiosity of market participants. Could this be a pause operation in the exchange rate?

As discussions about the new era in monetary policy unfold with Mehmet Şimşek and Gaye Erkan, we observe that the market still harbors concerns about intervention, which contradicts the dynamics of the economy. Despite emphasizing that policy steps will be taken towards stability and confidence, the market remains hesitant.

On June 22nd Reunion

Market players are expecting uncertainties regarding fluctuating exchange rates and negative reserves to be addressed for the future. It is perceived that the convergence of significantly divergent exchange rates and interest rates is inevitable. If the new administration aims for credibility, it should prioritize achieving this convergence.

While the practice seems orthodox, the discourse of heterodoxy is perceived as another disruptive noise in the market. While Şimşek’s initial statement was “a return to rationality is inevitable,” the surrounding political rhetoric is in a “we know what we know” tone. This raises doubts about whether there is a brake on Şimşek’s actions.

Why is verbal guidance important in interest rate decisions?

We have been emphasizing the importance of communication in monetary policy for days. Verbal guidance could have been provided before the interest rate decision to reduce exchange rate stress. Moreover, verbal guidance would have reassured the market, demonstrating the newly established economic management’s commitment to trust. It could have even been more effective than a five or ten-point interest rate increase.

The market looks at the dynamics of both words and actions, regardless of how competent individuals are appointed. There has been a significant erosion in corporate communication so far, and it will take time to restore it. Not managing communication when it is most needed is, in my opinion, a major weakness. The market looks at the trust dynamic. Building trust is possible through a cycle of “saying what you will do and doing what you say.” However, if you do not communicate what you will do, the market will create its own future scenarios based on its concerns.

The contradicting situation between the deadlock in the exchange rate and market dynamics:

According to the data from the Central Bank of the Republic of Turkey (CBRT), gross reserves declined to $99.8 billion in the week of June 9th. The previous week, gross reserves were $100.5 billion. Net reserves, excluding swaps, turned negative to -$59.9 billion last week, compared to -$61.2 billion the previous week.

The downward trend in foreign currency deposits continued in the week of June 9th. Domestic residents’ foreign currency deposits decreased by $1.8 billion, reaching $173.7 billion. Parity-adjusted foreign currency deposits decreased by $1.6 billion.

It seems that we will have to wait for June 22nd for a stronger reverse dollarization. However, if it is not supported by a text and a breath that will instill confidence in the market, it can turn into a complete disappointment. The deadlock in the exchange rate indicates a narrowing room for movement.

In the end, we gave way to the exchange rate, but we thought that no additional brakes would be needed towards the June 22nd intersection. However, we have seen that the fear of “haste leads to disaster” has forced the Central Bank to intervene. We have one more week until the June 22nd interest rate intersection. Let’s hope that a midnight front-loaded interest rate decision does not come.

Şeref Oğuz/Ekonomim

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