What to Make of the Lira Weakness
A few days ago, I used a guest post to discuss why Turkish assets are not doing well.
While Taylan Bilgic, the author of the column, was arguing that risk aversion was the main culprit, I added that domestic factors were important as well, as Turkish assets were also underperforming with respect to peers. I would like to expand on that point using the recent bout of lira weakness as an example:
Many tied yesterday’s lira weakness in the afternoon to the Central Bank’s decision to stay on hold and its dovish language. But there were also important political developments around the same time, which I outlined in the previous post.
If you take a slightly longer perspective, you’ll notice that lira has been quite weak of late:
There could be any of several domestic factors behind this recent bout of lira weakness: The most common explanation is foreigners exiting because of political or current account worries. But it could also be that domestic companies are worried as well, and they have started to close their open foreign currency positions. The latter would worry me much less than the former, as it would strengthen corporate balance sheets and make them more resilient to a sudden large weakening in the currency. BTW, this argument has found its way into next week’s Hurriyet Daily News column, where I discuss yesterday’s rate decision with my cheesiest title ever- it is again a wordplay as well as a literary homage…
Anyway, data on capital flows and open positions are available. While calculating open positions is a bit tricky, capital flows are very straightforward to figure out, at least for bonds and equities. And you can also see short-term money flows from banks’ off balance sheet positions. These data are lagging a couple of weeks or so, but they are there. So I should try to get out a post where I look at the relative magnitude of each in the next week or so…
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