On Wednesday, the Turkish Lira (TRY) faced a heavy sell-off and lost 7.2% of its value. But on Thursday, the currency only lost 0.8%, which shows signs of stabilization.
According to traders, the current price of the TRY is normal as the markets wait for the new central bank's governor to take charge.
Easing Controls On The FX Market
One of the major reasons for the sharp sell-off on Wednesday can be traced back to the easing controls on the FX market. But it appears that the selloff forced the authorities to intervene once again to stabilize the TRY exchange rate.
One of the tools used by the Turkish authorities to maintain the value of TRY is to provide more liquidity in the market. So in a sense, we can say that the government is defending the Turkish Lira.
After the intervention, the TRY moved from 23.38 to around 23.3965, which took this year's losses to 20% only. According to data, the Turkish central bank also received around $3 billion worth of inflows into its deposit accounts.
Another thing worth noting is that the CDS (5-year credit swaps) have also gone up by 34 points during Wednesday and was last seen at 516 bps.
But despite the recent stabilization, we can't ignore the fact that the recent selloff in TRY was only last seen in 2021. At that time, the Central Bank of Turkey slashed rates as part of President Erdogan's policies.
However, the recent drop in the Lira also signifies that the currency is moving towards a free-traded currency with fewer controls and restrictions.
This has also raised questions as to how far the Turkish government is ready to go to defend the Turkish Lira. After all, the government has to tap into its reserves to support the TRY against other currencies. In other words, the government is spending money on supporting TRY which could be better spent somewhere else.