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Turkey State Banks Prop Up Lira Ahead of Syria Incursion

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Turkey State Banks Prop Up Lira Ahead of Syria Incursion

  • Currency weakens to a session low as military offensive begins
  • Losses come even as state lenders increase dollar sales
A bureau de change in Istanbul.

A bureau de change in Istanbul.

Photographer: Miguel Angel Sanchez/Bloomberg
A bureau de change in Istanbul.
Photographer: Miguel Angel Sanchez/Bloomberg

The lira weakened as Turkey began a military offensive into northeastern Syria, stymieing efforts by state banks to buttress the currency through dollar sales.

The Turkish currency reversed earlier gains to fall almost 1% after President Recep Tayyip Erdogan announced the cross-border operation. The losses picked up even as state lenders increased the amount of dollars they were selling to the market, according to people with knowledge of the matter, who asked not to be identified because the information isn’t public.

Earlier, the state banks sold U.S. currency around the 5.84 per-dollar mark, the people said. The lenders bought the equivalent of about $1 billion of lira on Monday and Tuesday, according to two of the people. The currency was trading down 0.6% at 5.8630 per dollar as of 6:50 p.m. in Istanbul.

Currency falls as Turkey's military moves into Syria

The currency posted its biggest decline since early August on Monday, amid concern that Turkey and the U.S. were lurching toward a fresh diplomatic crisis over Ankara’s plans in Syria. While American President Donald Trump tacitly endorsed the operation on Sunday, a day later he threatened to “obliterate” Turkey’s economy if it did anything he considered “off limits.”

The dollar sales may revive a debate about the strength of the central bank’s foreign-currency buffers, which surfaced in the weeks leading up to municipal elections in March. At the time, state banks were said to have sold between $10 billion and $15 billion to stem the lira’s depreciation.

“The central bank doesn’t have sufficient foreign reserves to intervene on a large scale for a prolonged period,” said Piotr Matys, a strategist at Rabobank in London.

Reserve Debate

Turkey has $35.7 billion of international reserves, up from $26.1 billion in March, according to official data. Still, in a report published Tuesday, Capital Economics said Turkey’s gross external financing requirements as a share of the cash buffer were among the highest in emerging markets.

Lira’s in for a Rough Ride If Turkey Moves Troops Into Syria

“Turkey’s poor external position means that the mere threat of more action would weigh on the lira and may force the central bank to reverse its easing cycle,” wrote Jason Tuvey, a senior emerging-markets economist at Capital Economics in London.

Since July, the Turkish central bank has slashed borrowing costs by 750 basis points, a front-loaded easing effort designed to boost the economy after its first recession in the decade. The looser monetary conditions, however, threaten to erode the currency’s yield appeal, exposing it to shifts in investor appetite.

Erdogan Praises Central Bank’s Rate Cuts, Promises More to Come

Still, there was little sign of distress in other corners of the market. One-month implied volatility on the Turkish lira -- a gauge of expected price swings -- fell for a second day. The Turkish government’s 10-year benchmark bond advanced, with the yield dropping 15 basis points to just under 14%.

While the lira could weaken toward 5.95 against the dollar, “we do not think these geopolitical complications will ultimately trigger another major re-pricing,” analysts at Credit Suisse in London, including Nimrod Mevorach, said in a note.

— With assistance by Cagan Koc

(Updates prices throughout)