by Jon Beddell
Foreign Currency Market Update – GBP / TRY Update
Sterling’s recent performance versus the embattled Turkish Lira has been a notable bright spot for the Pound when compared to how well (or otherwise) the UK currency has fared against most of its peers lately. The Lira has weakened by nearly 20% since October, partly as a result of record low interest rates in Turkey. The Turkish Central Bank has been on a mission to discourage flows of so called “hot money” into the currency, cutting interest rates to 6.25%. A weaker currency can stimulate exports by making them appear less expensive to foreign buyers as well as increasing the cost of imports, helping to correct the large current account deficit. This, and other moves to help discourage short term capital inflows have seen the Lira hit two year lows against Sterling in early March. Since then the Lira has regained a few percent, but is still trading at extremely attractive long term levels.
Over recent days the natural disaster in Japan has sent shock waves through the world’s financial markets, sending investors scurrying in search of so called “safe haven” assets. Predictably, this meant traders selling out of the more volatile “high yielding” currencies and reverting instead to the relative safety of larger currencies like the US dollar, and perversely, the Japanese Yen! In times of crisis investors tend to repatriate assets, but in this case the repatriation flows are exacerbated by investors who borrowed Yen (or Dollars) in order to fund bets on higher yielding currencies. If the situation surrounding Japan’s nuclear facilities does not improve and stock markets remain volatile the Dollar is likely to remain well supported, and higher yielding currencies like the Turkish Lira will remain under pressure.
The Bank of England held interest rates at a record low of 0.5% last week as expected. This still produced a mild negative reaction for Sterling as some investors were holding the Pound in the hope of a surprise hike. When it didn’t come they sold Sterling. We will have to await the minutes of the BoE meeting (due for release next Wednesday morning) to see how the nine member committee voted. The chancellor is also due to present the 2011 budget on the same day.
There has been relatively little in the way of key economic data so far this week. Wage growth data in the UK this morning was exactly in line with expectations, showing 2.2% annual growth. A higher figure would have added pressure to the BoE to increase interest rates. To date, wage inflation has remained tame, giving the bank at least one excuse to keep rates at record lows.
The trend is clearly positive for Sterling, but the exchange rate has reached levels not seen for some time, and the last few times we’ve been up here the Pound has tended to retreat sharply over the next few weeks. Buyers of the Lira should consider covering any requirement in the short term while the rate is close to the recent highs.
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