Türkiye: The big bet on the pound [γράφημα] – Financial postman

Turkey has put forward a strategic plan to boost domestic and international demand for its national currency, which is trading at 27.4 to the dollar, near its lowest level ever.

The new head of the Central Bank, Hafez Gay Erkan, announces his intention to achieve this goal, and confirms that the first indicators in this direction are positive.

Turkey’s ‘normalcy’ is working – bets against the pound are at their lowest level in two years

Mehmet Simsek himself, the economic czar who took over as finance minister after Tayyip Erdogan’s election victory in May, is asking Turkey’s markets and people to be patient as his new crew of technocrats, including Guy Erkan, tries to reverse years of economic mismanagement. . After years of unconventional policies, such as lowering interest rates in an environment of very high inflation, it is now necessary to restore investor confidence in the faltering $800 billion economy.

In his first interview with international media since his appointment in June, Simsek said he was seeking to “balance the economy and ease domestic demand.” He also stated that President Erdogan should support a reversal of monetary policy, which now involves significant increases in interest rates. “We are on the right track. There are strong signs of a return to confidence. But we have to be patient, (the situation) is still a challenge.”

In previous years, Erdogan had pushed successive finance ministers and central bank governors to support the lira with foreign reserves, calling for lowering interest rates for political motives with the flight of foreign capital and the escalation of inflation.

The first positive signs are now beginning to appear for the Turkish lira, at least according to Goldman Sachs. The investment bank says that purchases of the pound have begun to rise as Turkey intensifies its campaign to reduce inflation.

These are so-called carry trades, a forex investment strategy that involves borrowing in a currency with a low interest rate to buy a currency with a higher interest rate. This is one of the most common forex trading strategies. It now appears that investors are buying the Turkish lira because interest rates are high – and less fearful of the possibility of further devaluation of the currency due to a change in monetary policy by the country.

Strategists at Wall Street Bank expect interest rates on the Turkish lira, when adjusted for future inflation expectations, to become positive in the coming months. Real interest rates in Turkey are currently at minus 29%, one of the lowest in the world if inflation is taken into account. The real interest rate is the nominal interest rate (30%) minus the inflation rate.

If the central bank raises its benchmark interest rate to 40% by the end of the year from 30% today, this would favor long trades in Turkish lira. Such a trend would push more people to borrow money in countries with low interest rates to earn higher returns by buying lira in Turkey, Goldman Sachs said. Just a few days ago, Turkish interest rates rose to 30% from 25%.