The Turkish lira has started to decouple from other emerging market currencies following the strong messages conveyed during the 13 hours of meetings Deputy Prime Minister Mehmet Şimşek and Central Bank of the Republic of Turkey (CBRT) Governor Murat Çetinkaya held on Tuesday at the London office of Bank of America Merrill Lynch. Top economic officials met more than 100 investors in London and emphasized Turkey's determination to rebalance the economy, reduce inflation and current account deficit, and the country's openness to business. Following the meetings, the U.S. dollar retreated by 2.15 percent and was trading at TL 4.44 at 3:21 p.m. local time while the euro also fell by nearly one percent to TL 5.18.
Şimşek and Çetinkaya's visit to London came after the CBRT raised the late liquidity window, the current funding tool, by 300 basis points at an emergency meeting on May 23 and the bank's simplification decision on Monday, which has been observed to stem the slide in the lira. Last week's rate hike and the narrowing down the interest rate corridor to a single main funding tool set as one week repo at 16.5 percent ahead of the London meeting were seen as strong messages addressing international markets as investors had been rattled over the past couple of weeks due to the plummeting lira. The lira fell as low as to TL 4.93 against the U.S. dollar on May 23 before the CBRT decided on an emergency rate hike.
On his social media account, Deputy Prime Minister Şimşek confirmed that the meetings with investors in London were very productive and underscored the high interest of foreign investors in Turkey.
The key messages conveyed during the meetings were the strengthening monetary and economic policy instruments, the launch of rebalancing efforts of the Turkish economy, the priority is to reduce inflation and the current account deficit and the acceleration of structural reforms in the post-election period as well as Turkey's openness to business, Şimşek said on social media.
Turkey's current account deficit rose to $4.8 billion in March and it was $47.1 billion in 2017 while inflation was 10.85 percent in April.
The initial reaction of the Turkish lira was positive, climbing 2.15 percent in value against the dollar to trade at 4.44 to the greenback in the afternoon session. The dollar opened the day at TL 4.54 yesterday after consecutive days of retreating against the lira. On Tuesday, the USD/TL exchange rate had a volatile day due to the rise in the dollar index, oil prices and increasing risk appetite.
The largest Swedish bank SEB Emerging Markets Chief Strategist Per Hammurlund stressed that President Recep Tayyip Erdoğan will follow fiscal discipline before the June 24 elections and underscored that the dollar will fall to 4.44 against the Turkish lira, Bloomberg reported.
"The fall in the U.S. bond yields is significant for the Turkish lira however the spike in lira is also stimulated by the Turkey-specific factor. I personally believe that the lira will stabilize and strengthen in the upcoming period," Hammurlund said.
He referred to the CBRT's rate hike last week and simplification of policy framework, stressing that these moves prove that the central bank will operate independently while designing its monetary policy.
"The independence of the central bank is good news for the Turkish lira," he said.
According to a report by Reuters, portfolio managers who met with Şimşek and Çetinkaya emphasized that the messages were highly soothing.
A manager who anonymously spoke to Reuters said, "The bottom line was that they have already hiked rates, and they stand ready to hike rates again if we get another bad inflation number, which I think is before the next central bank meeting."
Further tightening will depend on May inflation data to be released on June 4 and the nation won't resort to introducing capital controls, the manager cited the officials as saying.
The simplification of the structure had been one of the main topics of discussion in the Tuesday meetings, said sources.
Since 2010, Turkey's central bank has relied on multiple rates to set borrowing costs, creating a complex system that economists say has made policy less predictable. It has funded the financial system through the late liquidity window for the month while keeping the repo rate steady at 8 percent.
However on Monday, the central bank announced it would return to using the one-week repo rate as its benchmark, in the latest move by authorities to reassure investors.
"In a context in which demand in safe heaven increases and emerging market currencies are negatively affected, the Turkish lira is decoupling positively," GCM Forex Research Expert Enver Erkan said, citing the central bank decisions as well as meetings of Şimşek and Çetinkaya in London.
The retreat of the dollar below 4.60 against the Turkish lira solidifies the forecasts that the rise of the Turkish lira will continue in the upcoming period and the lira will climb to 4.40 per dollar, he added.
Meanwhile, the lira shrugged off the U.S.-based credit rating agency Moody's report in which it slashed forecasts for Turkey's growth rate to 2.5 percent in 2018 thanks to all the monetary policy developments and the strong emphasis on the independence of the central bank. The Moody's report dropped the estimates of the Turkey's growth to 2.5 percent this year from 4 percent, citing the sell-off in the lira and the impact of double-digit inflation on growth.
The Turkish economy grew 7.4 percent in 2017.
