Strong fluctuations in the pound after Erdogan’s alternative ‘plan’ (upd)

LAST UPDATE 12:14

The Turkish pound is fluctuating sharply after the rally of almost 50% this week, as investors look at the viability of government measures to strengthen the currency.

In the morning, it jumped up to 20% against the dollar, extending its historic recovery from the low it was at, as President Erdogan presented a plan that stressed that it would guarantee deposits in local currency, against market fluctuations.

The currency fell, then strengthened in a volatile session, at 11.0935 against the dollar, from closing yesterday at 13.15 pounds.

It now stands at 12.9643 pounds against the dollar.

The course of the pound makes it the most volatile currency in the world, with the range of expected fluctuations in the next year reaching a record high, showing that traders expect greater “drama” in 2022.

On Monday, the Turkish currency jumped to its highest level since 1983, as President Erdogan said he was planning measures such as introducing a plan to protect savings from the pound.

The government will make up for the losses suffered by pound holders if its fall against hard currencies exceeds interest rates promised by banks, Erdogan said.

It could signal the worst for the pound at the moment if the program can restore retail depositors’ confidence in the pound, says a Bank of Singapore analyst.

However, he stressed, at the end of the day, until interest rates provide a reliable protection against inflation, the pound will tend to be volatile and under declining pressure.

The fluctuations in the Turkish pound have led the instability of the dollar-pound exchange rate to 53%, exceeding the levels recorded in the monetary crisis of 2018.

The country’s bonds have also skyrocketed, with 10-year government bond yields falling by 90 basis points, the biggest drop since April.

The government’s new measures are aimed at easing retailers’ demand for dollars and ending a three-month currency turmoil.

But it remains to be seen how local investors will react and whether the new policies will be sustainable.

“Erdogan’s statements may help the currency, but I think it depends on the credibility and whether depositors believe this policy can really be implemented,” said Brendan McKenna, a Wells Fargo analyst.

“At the moment, the Turkish institutions are not very credible, so there may be difficulties for depositors to participate in the project,” he added.

In a speech late Monday night, Erdogan said a series of measures would reduce the burden of the monetary collapse of recent weeks, and encouraged Turks to keep their savings in pounds instead of dollars.

He did not provide details on how the government would fund this potentially costly and inflationary initiative.

Prior to the announcement, the pound fell more than 10% to a record low of ,4 18.4 against the dollar.

Later it reached 12 pounds – in the largest intra-conference rally – to close the day with a rise of 25%.

About $ 1 billion was sold in the markets after his announcement, according to the head of the Turkish Banks Association. According to estimates by three bankers, about 1-1.5 billion dollars in savings were converted into pounds on Monday night.

The rapid recovery was prompted by Erdogan’s promise to guarantee deposits, which he said would prevent Turks from converting savings into hard currencies.

“We are presenting a new alternative to citizens who want to allay their concerns about rising exchange rates when valuing their deposits,” Erdogan told a cabinet meeting, reiterating his support for a low-level policy. , from which the fall of the pound began.

While the government has hailed the pound recovery as a major victory, economists have called its low-interest-rate economic plan reckless, saying inflation will soar to 30% next year.