Turkey's lira edged close its all-time low on Friday, driven by fleeing foreign investors but mitigated by local bargain hunting, a day after the central bank unexpectedly cut interest rates and gave little hint how low it could go.
The currency - prone to sharp swings and an emerging-markets laggard for several years now - weakened 1% to 8.855 versus the dollar by 0749 GMT, near its low water mark of 8.880 set in June.
The lira also dove on Thursday when the bank slashed its key rate by 100 basis points to 18% despite high inflation, delivering the stimulus long sought by President Recep Tayyip Erdogan and reinforcing analysts' worries over political interference.
The central bank provided little guidance on the future path of policy, yet Societe Generale, Barclays, JPMorgan, and Goldman Sachs all said they expect further rate cuts in coming months.
Still, after a years-long exodus of foreign funds from Turkish assets, the lira's fate is largely in the hands of local businesses, investors and savers.
Traders said sales of dollars and other hard currencies by Turks was instrumental in limiting the lira depreciation on Thursday, when corporates and individuals sold $1 billion-$2 billion according to the calculations of four traders.
"The central bank's decision, which was unexpected for some, put the lira under serious selling pressure. But seeing it as an opportunity, locals' forex sales of at least $1 billion was the main factor limiting the losses," said a trader who requested anonymity.
Turks who bought dollars a year ago booked a 15% profit, traders noted. Locals also snapped up lira in March when it plunged after Erdogan fired a hawkish central bank chief and installed Sahap Kavcioglu as governor.
Kavcioglu began giving dovish signals early this month, paving the way for a cut - though few economists polled by Reuters had expected it this month given inflation reached 19.25% in August.
Foreign investors hold just over 5% of Turkish government bonds, down from more than 20% five years ago. That slide is largely due to double-digit inflation and worries over central bank credibility, after Erdogan ousted the central bank's last three governors over a 20-month span due to policy disagreements.
Phoenix Kalen, strategist at Societe Generale, predicted a gradual pace of lira depreciation given Turkish retail investors are highly skeptical about the central bank's willingness to get inflation down to a 5% target.
"Retail flows now largely determine the course of the currency, not international market participants," she wrote.
"So, it comes down to a question of public confidence and how fast that picture might deteriorate."