Turkish markets shattered, prompting Central Bank intervention

ISTANBUL – Reuters

This file photo shows a man walks past a stock exchange display board. The dollar climbed to an historic high against the Turkish Lira and stocks began the day with losses, after the Federal Reserve (FED) minutes hinted that the U.S. was on course to begin tapering stimulus as early as next month. AFP PHOTO / BAY ISMOYO

The dollar climbed to an historic high against the Turkish Lira, bond yields jumped and stocks began the day with losses, after the Federal Reserve (FED) minutes hinted that the U.S. was on course to begin tapering stimulus as early as next month.

The lira fell to 1.9895 to the dollar, its weakest level ever, from 1.9740 late on yesterday and 1.9870 overnight.
Turkey’s 10-year benchmark bond yield saw two-digit levels, being one of the financial indicators that have been hit hardest. It soared up to 10 percent from a close of 9.70 percent on yesterday, but firmed around 9.99 as of 9.40 a.m. GMT.

The stock exchange, which displayed its worst performance yesterday, also opened the day with losses reaching up to 3 percent.

It fell even below 67,700 after opening, but rebounded to a level of 68,000, partially making up its losses.
The main Istanbul index 2.77 retreated down to 67,778 points at 9:50 p.m. (7.50 a.m. GMT).

Central bank intervenes

In response to market rally, the Central Bank didn’t hold its regular one-week repo auctions today and announced further measures to protect lira against slide.

The bank had said yesterday it would hold daily forex-selling auctions of a minimum $100 million every day as a further tightening step to shore up the weak lira.

In today’s written statement, it said the minimum auction amount will be announced everyday at 10.30a.m (08.30 a.m. GMT) and if it would be found necessary, the announced amount can be revised upwards for one time only.

A forex sale auction of a minimum $100 million will be held during additional tightening days at 16:30 p.m. (1330 GMT), it had said yesterday.

Today’s minimum auction amount has been announced as $350 million.

The bank also said the additional tightening program announced yesterday will continue until tomorrow.

Until now, the Central Bank has not sold foreign exchange on days when it implements additional tightening by not holding its regular one-week repo auctions.

The central bank raised its overnight lending rate, the upper end of the interest rate corridor it uses to control monetary conditions, for a second straight month on Aug. 20, hiking it by 50 basis points to 7.75 percent in a surprise move to try to prevent an uncontrolled slide in the lira.

But it appeared not to be enough, with economists predicting the bank will need to widen the rate corridor by raising the lending rate further.Fed affect

Fed affect

The FED minutes showed members of the Federal Open Market Committee had different opinions as to when the FED should start winding down its bond purchases.

The overall view, however, was that the minutes did not materially change the market’s expectation that the FED could start tapering its monetary stimulus as early as September.

Emerging markets again bore the brunt of the selling pressure as many have come to rely on cheap dollars to underpin domestic demand and fund current account deficits.

Turkey is particularly vulnerable, being heavily dependent on foreign inflows to finance its gaping current account deficit, running at over 7 percent of national output.