Why sharp fluctuations in exchange rates? – 2

Yesterday, I told you about the global causes of sharp exchange rate movements. Today, I will try to shed some light on fluctuations arising from the circumstances Turkey is current facing.

The exchange rate movement that kicked off Friday afternoon was quite interesting indeed. I don’t know for sure whether it was manipulated or not. However, I think we should at least take a look at the performance of developing country currencies from Thursday, March 21st to Friday, March 22nd.

The worst performance against dollar amongst 24 developing country currencies was Turkish lira, followed by Brazilian Real, Argentine Peso, South African Rand and Russian Ruble.

However, there’s a big difference between more than 5% depreciation of TRY against USD and Real’s 3% depreciation. Apparently, other countries had a near miss that day with less than 2% depreciation. But, how did this happen in the first place?

As you may remember, I told you last week that Dollar’s post-Fed decision depreciation against Euro would only be a temporary thing as the Euro Zone already has enough problems to deal with. Indeed, news from Germany and other leading countries weren’t cheerful at all, consequently causing Euro’s sudden depreciation against USD to throw markets off balance. Dollar’s appreciation against Euro resulted in a rise in USD to TRY Exchange Rate as well. However, those, who failed to notice that dollar’s recent rise in value was only caused by changes in the parity, were sent into a huge panic.

“A little bit of bad luck, lack of experience, and a lot of hurry…”

You know how problems keep coming back in times like these. This was how people fell into a panic when Botaş bought a considerable amount of foreign currency from CBRT, considering that they were already confused after a new regulation on foreign currency accounts published in the Official Gazette on the 21st of March. Thus, exchange rates started a wild ascent. Then, a bigger mistake was made. In a manner that it could easily be interpreted into “I will no longer issue TRY since you use it to buy foreign currency”, Central Bank announced that it stopped weekly repo tenders.

In short, due to a bit of misfortune and lack of experience, exchange rates started to climb sharply. The economy administration, however, started investigation on a foreign institution due to manipulation allegations, whereas the administrators should have improved their ability of managing developments and properly directing them.

When I put it that way, some of you may say, “Things wouldn’t get so out of control if somebody did the right thing at the right time”. But, we’re past being sorry now. We should better keep ourselves ready for the next one.