By Nevzat Devranoglu

ANKARA, Reuters – Following a six day slide, traders believe authorities will now aim for a weaker level as low as 15.5 USD in a month-long effort to stabilize the exchange rate.

According to four Turkish traders, the central bank likely has a new trading zone of 15-15.5, which will allow some depreciation to counter a global flight toward the dollar. It also relieves the pressure on the bank’s shrinking foreign reserves.

A bank trader stated that more depreciation will be permitted so the lira is between 15.5-16 to the dollar. This has happened as inflation pressures emerging markets and the U.S. Federal Reserve raised interest rates.

After unorthodox interest rate reductions that rattled economies, the lira returned to its December lows.

It fell to 15.4295 on Thursday and was still at 15.382 by 0832 GMT. Following a 44% drop last year, the value has fallen more than 14% this year.

The central bank’s reserve balances were actually negative after swaps were accounted for. Therefore, traders suggested that lira weakness was needed if the bank wants to continue trying to stabilize the exchange rate like it did since December crisis.

If the government establishes a level of exchange rates that is fixed without taking into consideration international developments, then the reserve cost will be huge. According to Reuters, a top banker stated that an exchange rate cannot be held at a particular level long term with negative reserves.

We see this as a necessity, even though we don’t think it is the right policy. It could easily have spiraled out of control.

In recent years, the central bank’s forex reserve has dropped dramatically. This is primarily due to the sale of billions in market interventions by the bank to end the crisis. Only a few of these were publicly announced.

At the end April, $17 billion was left in foreign reserves.

According to the central bank, the market determines the exchange rate. However, bankers have calculated that the reserve of the central bank has not been increasing as fast as it should.

Investors describe the FX rate as a “government-controlled” regime. Many believe it will not last the long-term because Turkey’s inflation rate and current account deficit are astronomical and money is fleeing emerging markets.

The currency is still relatively stable, except for the Russian invasion of Ukraine which caused Turkey’s energy imports to soar.

According to Reuters this week, in an effort to stabilize the markets, authorities requested that banks trade with corporate clients only between 10:00 a.m. (0700 GMT), and 4:00 p.m. (1300 GMT). This is to minimize price swings.

The December crisis saw the lira reach 18.4 against the dollar at its peak. This prompted the central bank and government to take measures, including an announcement to safeguard lira depositors from depreciation.