What has happened so far this month with the Turkish Lira is what currency dislocation looks like. The Fed’s taper chit-chat is like a butterfly flapping it’s wings in Argentina. In complex systems the butterfly effect matters. The Wall Street Journal’s Peker, Candemir and Karakaya report here:
ISTANBUL—Turkey’s central bank resorted Thursday to direct currency sales for the first time in two years to prop up the lira, but the currency kept on spiraling to record lows amid a broad-based investor exodus from emerging markets.
Policy makers in Ankara started selling dollars in the European morning as the dollar jumped to 2.2973 against the lira, according to traders familiar with the transaction. The lira bounced back somewhat in response, but plunged again within hours. That drew in the central bank for a second time, traders said, but again the lira quickly sank, with the dollar soaring above 2.30 to the lira.
Mounting expectations that the U.S. Federal Reserve will increase the rate at which its scaling back monthly bond purchases has hit economies dependent on international investors to plug external funding shortfalls, such as Turkey and South Africa. The pressure also spread to other developing nations like Argentina, which faces rising inflation and social unrest, as well as Russia and Mexico.
“It’s been a concerted selloff in emerging market currencies, a day of big losses for the high-yielding pack across the board. Turkey is the classic example. Current account is still huge and we have political layers,” said Luis Costa, a Citigroup strategist in London. “The story in the lira is extremely complicated and at 2.3 is has much further to go. We are short of the currency. The move has been way too fast and has broken all forecasts.”
E.J. Smith works with new investors that have $2 million or more to invest. He can be reached at:ejsmith@youngresearch.com
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