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The Turkish lira has dropped to all-time lows on Thursday, pushing the USD/TRY to 7.2690 on concerns that the Central Bank is running out of FX reserves. Turkey’s reaction stiffening FX trading rules is questioned by FX analysts at Rabobank who warn about a USD/TRY rally to 10 or higher.

Key quotes

“Turkey is rapidly running out of precious FX reserves, even though the central bank is boosting them borrowing USDs from commercial banks through FX swaps.”

“Turkish officials continue to argue that hard currency buffers are sufficient. The market has the opposite view on this crucial issue. The history of financial markets (especially in the EM universe) is full of examples of the market proving officials wrong when it comes to the ability to defend a national currency.”

“We remain of the view that third option (Allow the lira to trade freely without the regular FX interventions that led to a sharp fall in FX reserves over the past few months) would be the most market-friendly and the most rational. However, it would have to be accompanied by a critical element of comprehensive structural reforms overseen by the IMF to prevent USD/TRY from rallying precipitously to 10 or even higher level.”