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48 Hours on Turkey’s Roller Coaster Currency Markets

A money changer counts Turkish lira banknotes at a currency exchange office in Ankara, Turkey September 27, 2021. REUTERS/Cagla Gurdogan
A money changer counts Turkish lira banknotes at a currency exchange office in Ankara, Turkey September 27, 2021. REUTERS/Cagla Gurdogan
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48 Hours on Turkey’s Roller Coaster Currency Markets

A money changer counts Turkish lira banknotes at a currency exchange office in Ankara, Turkey September 27, 2021. REUTERS/Cagla Gurdogan
A money changer counts Turkish lira banknotes at a currency exchange office in Ankara, Turkey September 27, 2021. REUTERS/Cagla Gurdogan

Turkey's financial markets saw their wildest 48 hours in decades after a plunge in the lira forced the government into a radical new plan to convince Turks to stick with the currency.

Incentives include a promise to hand out money if the country's inflation rate continues to exceed banks' savings rates, the removal of a withholding tax normally charged on the government's domestic bonds and an increase in private pension contributions.

The lira had threatened to spin out of control having lost more than half of its value since the central bank began slashing interest rates in September. The new plan triggered a 32% rebound on the view that Turks are less likely to panic and convert all their lira into dollars or gold for now, according to Reuters.

The jump has put the currency on course for its second best week in recent memory with only a 33% gain in 2001 surpassing it.

Currency experts caution that it has happened at the quietest time of the year in FX markets meaning there has been little resistance to the moves.

It also meant any trader who was shorting the currency - or betting it would continue to fall - would have been forced to quickly close their bets to prevent major losses.

Many of those bets are made using currency swaps, so in the mass scramble to safety the swap rates spiked.

The rebound would have been amplified because most big banks and traders have closed positions ahead of the Christmas break at the end of the week, meaning reduced volumes.

Refinitiv data, which covers a select group of platforms, shows trading volumes over the last two days of 34,000 and 41,000 lots, some of the lowest of the year.

The main FX market lira volatility gauges were already at record highs after the lira hit record lows last week but they rose further after the lira saw one of its biggest intraday swings - 55% at is most extreme - yet.

The country's main stock market was also forced to halt trading repeatedly as stocks winced at the sharp jump in the currency. Istanbul's main bourse (.XU100) is down over 13% since Monday, putting it on course for its worst week since the 2008 financial crisis.

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Venezuela Depreciation Risks Reversing Years of Inflation Gains

People walk through a market in the low-income Petare neighborhood, in Caracas, Venezuela November 16, 2024. (Reuters)
People walk through a market in the low-income Petare neighborhood, in Caracas, Venezuela November 16, 2024. (Reuters)
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Venezuela Depreciation Risks Reversing Years of Inflation Gains

People walk through a market in the low-income Petare neighborhood, in Caracas, Venezuela November 16, 2024. (Reuters)
People walk through a market in the low-income Petare neighborhood, in Caracas, Venezuela November 16, 2024. (Reuters)

Currency depreciation is set to reverse years of declining inflation in economically beleaguered Venezuela, public and private sector sources say, as foreign currency sales fall short of demand and the socialist government keeps tight-lipped about its strategy.

After years of hyperinflation and amid broad US sanctions, in 2022 the administration of President Nicolas Maduro began using orthodox policies including credit restrictions, lower public spending, a fixed dollar-bolivar rate and central bank sales of billions of dollars in foreign currency to tamp down consumer prices.

Maduro, who will begin his third term in January after a disputed election that the opposition and international observers say he lost, has said his government defeated inflation of more than 100,000% and prices in 2024 are similar to those in 2014.

But the administration's policy has now changed.

After more than nine months of the exchange rate being held at 36.5 bolivars to the dollar, the government in mid-October allowed the currency to float, beginning a depreciation that has seen the bolivar slide to about 45 versus the dollar, according to central bank figures.

Analysts say the over-valued currency made imports cheaper than locally-produced goods, impacting Venezuela's private sector and helping push prices up by 12% in nine months.

The untethering of the exchange rate will also put upward pressure on prices in the final quarter of 2024, financial and business sources said, with analysts predicting in a LatinFocus survey the rate will end the year at 50 bolivars to the dollar.

Year-on-year inflation was 25% through September. Official figures for October have not yet been released.

"For nine months the depreciation of the currency was zero while inflation was rising, which exposed problems in the exchange scheme," said economics professor and consultant Daniel Cadenas, who added the market depends on oil income. "For the system to function, there needs to be a growing source of exchange and that's not possible."

The government had predicted internally that inflation would close the year at 30%, two sources with knowledge of the projection said, but depreciation could increase the figure and local analysts have estimated inflation between 35% and 40%.

"There has been a necessary adjustment in the exchange rate that will have an impact on inflation," said Asdrubal Oliveros, head of local think tank Ecoanalitica. "The government has understood it needs to devaluate."

REDUCED CENTRAL BANK SALES

Vice President Delcy Rodriguez, who until recently also served as finance minister, told an event with business people last month that there must be "reflection" about the use of foreign exchange.

"We should all be concerned with how foreign exchange is used in imports. It is a subject the Finance Ministry is reviewing," she said. "We need to take care of foreign exchange because this is a blockaded country and there cannot be cheap exchange for hair dye."

Rodriguez's comments are the only ones made on the subject by the government since devaluation began. Neither the central bank nor the communications or finance ministries responded to requests for comment.

Private sector demand for cheap foreign exchange increased during the nine months the rate was held, even as the quantity of dollars being injected into the market by the central bank was reduced, sources said.

In July the bank was offering some $800 million, but by October that figure had fallen to $400 million, according to calculations by local consultancy Sintesis Financiera.

The central bank did not respond to a question about the reduction.

"The strategy in exchange policy is not going ahead," a government source said, without giving further details.

Food and medicine companies in Venezuela are allowed to pay for some of their goods with foreign currency, while other companies are given central bank promissory notes indexed to a specific exchange rate.

Two private sector sources said many businesses are eating through their inventories in the face of import difficulties.