The Kapali Carsi

Central Bank of Turkey reduces FX auctions…

… as I had predicted in Monday’s, Hurriyet Daily News column, which also appeared at the blog. I am expecting someone to say, “you are very good

Joking aside, I am not that good:)- it was pretty clear that the CBT would prefer decreasing FX auctions, or eliminating them altogether, before countering the lira weakness with a rate hike, as some were claiming. Besides, the demand for the auctions was very low for the past couple of days, with the bid-to-cover ratio at a freefall…

…and the lira continuing to depreciate against the USD EUR basket. Speaking of lira depreciation, such a persistently high FX is likely to have an impact on inflation in the coming months.

Another by-product of the decrease in auctions will be the decrease in FX reserves. If this had been early in the year, I would have been worried, as Turkey seemed not to have adequate reserves, at least according to an IMF paper I discussed at a Koc University ERF seminar a couple of months ago. I even hypothesized, in an addendum to my weekly Hurriyet Daily News column on the fate of the unpublished Turkey Staff Report, that IMF’ position on reserves could have played a role on the government’s attitude towards the Report. But there has been quite a build-up in reserves since then:

The Bank now has a strong hand in that regard, so reserves position should not figure out in the decision to scrap the auctions altogether…

4 Responses to “Central Bank of Turkey reduces FX auctions…”

economopoulosJune 29th, 2011 at 6:31 pm

I don't quite understand why the euro isn't plunging right now. Aren't there serious doubts about the future of the euro, including the very real possibility that the euro zone might fall apart? Do people really believe that Greece (or Ireland, Spain, Portugal for that matter) will be just fine a couple of years down the line, after enough pain and suffering, after firing enough government employees, or privatizing enough public assets? BTW, I would be very interested to learn more about this economic theory that the European authorities seem to be laboring under, that suggests that slashing public spending in the middle of a recession leads to economic growth or to a more balanced budget.

Emre Deliveli edeliveliJune 29th, 2011 at 7:39 pm

I am obviously no euro area expert, but remember that the euro will not be dismantle n the next couple of months. However, ECB has initiated the tightening cycle with Trichet's latest remarks. As for your comment on fiscal contraction, Martin Wolf has an excellent article in today's Financial Times, explaining why austerity alone risks disaster. Very highly recommended!!!

Emre Deliveli edeliveliJune 30th, 2011 at 7:41 am

BTW, I just got an email that presents two views on the euro. I pasted the Turkish text below, in case you speak Turkish, or want to have it translated by google or something else, but basically, Citi is thinking along your lines, while Goldman is using my intrest differential argument. And they are pointing to opposite directions for the euro….

Bugünden sonra euro için iyi haberler artık fiyatlara yeterince
yansıdı gibi görünüyor. Avrupa Merkez Bankası Başkanı Jean Claude
Trichet, dünkü açıklamasında ´´güçlü bir şekilde tetikteyiz´´
ifadesini yineledi ve Avrupa borç krizine dair iyimser duruş açıkça
görülüyor. Bu noktadan sonra gelecek aylarda euronun yükseliş için
yeni bir iyi haber bulmakta zorlanacağını düşünüyoruz. Tasarruf
programları ve devlet temerrütlerinden kaçınmak için özel sektörün
katılımı yönündeki olası baskı bölgede borç krizi tamamen sona erene
dek sürecek gibi görünüyor ki nunun için iki ya da daha fazla yıl


Tahminlerimize göre, euro-dolar paritesi, yukarı yönlü trendine devam
edecek. Döngüsel görünümde iyileşme ve ABD faizleri ile diğer ülke
faizleri arasında ayrışmasının yer aldığı senaryoya göre, euro dolara
karşı yükselecek gibi görünüyor. Elbette, risk algılaması ve Avrupa
´daki faiz beklentileri Yunanistan´daki gelişmelere yakından bağlı
olacak ancak bölgedeKİ gerilimin Euro Bölgesi´ndeki döviz temellerinde
gerçekten bir tehdit yaratacağını düşünmüyoruz.

Emre Deliveli edeliveliJune 30th, 2011 at 9:11 am

BTW, the daily auctions decreased from USD 40 to 30 mn. Sorry for forgetting to mention that:)…