Currency Information for Turkish Lira
Turkey is trying hard to demonstrate its credibility as a potential member of the
European Union. One manifestation of this ambition can be seen in the way the Turkish
Lira shadows the Euro. There is no formal pegged exchange rate; the central bank irons out fluctuations by selling Lira when demand is high and buying excess supply.
In the last 12 months the Lira has been trending stronger against
the Euro, partly
because of its significantly higher interest rates. At its December meeting the
Turkish central bank's Monetary Policy Committee (everybody has one now) lowered
its policy "repo" rate from 19.75 to 19.0 per cent. That is still very high by any
international standard and it is a huge deterrent to currency speculators who may
otherwise think to go short of Lira.
But for property investors it is not usually the Turkish Lira that matters. In the
resort areas it is hard to find an estate agent showing prices in Lira. Some attach
a Sterling price tag. Most price in Euros. This is not so unusual. In many countries
on the fringes of the Euro zone and the EU you will find real estate priced in Euros.
As much as anything it is a marketing ploy: the easier it is for potential clients
to understand the goods on offer, the more likely they are to buy. It is also fair
to say that Turkish vendors are still more comfortable accepting a hard currency
like the Euro than they would be to accept their own currency which, until only
a couple of years ago, was a complete dog. So with the Lira's relative stability against the Euro and estate agents' fondness for pricing property in Euros it is
the fluctuations of the Euro against the Pound that make or break a successful investment
in Turkish real estate.
During the last few months the Pound has not been having too good a time against
the Euro. International investors look at the Pound and think "falling interest
rates". They look at the Euro and think "rising interest rates". Even though the
notion of rising Euro interest rates looks ever more suspect, the fact of falling
UK rates is with us already. See how the US Dollar suffered as its yield began to
decline and you can imagine what might be in store for Sterling.
The Bank of England has been of no help whatsoever to its currency. Governor Mervyn
King has been at pains to point out the shortcomings of the UK economy and his acolytes
have scarcely been more supportive. Bank reports have highlighted the risks posed
by the liquidity and credit crunch. Bodies such as the Nationwide and the RICS have
pointed to falling property prices. Every newspaper in the land has drawn attention
to the high levels of debt that many families are carrying. "Doom and gloom" understates
the situation.
This ought to have made Sterling a basket case already but it refuses to lie down.
Investors look at the UK and see no reason for it to be treated particularly more
harshly than its neighbours and trading partners in North America and continental
Europe. Everyone is, after all, in the same global economic boat.
The bottom line is that whilst the gloom and despondency may have been a tad overdone,
Sterling is still vulnerable. A break below €1.38 would set up a potential target
of €1.20. Investors planning to put money into Turkish real estate in 2008 should
therefore hedge a decent proportion of their exposure; at least half. If the cover
is arranged as a "forward" purchase of Euros it will only tie up
some 10 per cent
of the nominal amount. The other 90 per cent will not be needed until settlement
day. A forward purchase of Euros is a cost-effective way of avoiding the risk of
a Sterling collapse. Given that the chance of Sterling making a great leap forward
is vanishingly small, the hedging strategy is well worth a look.
For more information and expert guidance on the currency markets, call
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