The Turkish lira underperformed major emerging markets peers on Monday with the central bank, due to meet to discuss interest rates later this week, seen having limited options to defend the currency ahead of a June general election.
The lira stood at 2.6985 to the dollar by 0930 GMT, slightly weaker than late Friday, and was underperforming the Russian rouble, South African rand and Brazilian real, all of which were firmer against the US currency. Its losses of around 13 percent against the dollar since the start of the year make the lira the worst-performing major emerging markets currency.
All 16 economists in a Reuters poll expect Turkey's central bank to leave interest rates on hold at its monetary policy committee meeting on Wednesday, despite the lira having tumbled through a series of record lows in recent weeks. A rate hike appears out of the question with growth slowing and the election looming, while the central bank has also been reluctant to defend the lira by selling dollars and eating into its $35 billion net forex reserves.
That leaves liquidity management as its sole option. The bank said last week it would consider a "measured cut" in its forex depo lending rate, the rate at which banks can borrow emergency dollar funds, and a measured hike in the amount it pays banks on lira reserves. The moves would aim to boost dollar liquidity by encouraging banks to hold more lira with the central bank.
But economists doubt such steps would have a significant impact, noting banks have not resorted to the forex depo window since 2012. The central bank could also tighten lira liquidity by cutting funding at its daily repo auctions. "With the central bank not in a position to spend reserves or use interest rates defensively, the lira will be at the mercy of broader USD trends and market sentiment regarding election outcomes," Istanbul-based Finansbank said in a note to clients.
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