Exchange rate perspectives

Let me be clear: Normally we would be expecting an exchange rate shock but we don’t, at least not now. Given huge reserve erosion year-to-date – even before - why is that so?

Consider the facts: Net reserves were depleted by $10 billion approximately yearto-date. However, swap-adjusted net reserves are possibly negative. The story is wellknown.

Tourism revenues were about $30 billion in 2019 – $24.5 billion from June to December. This year, the estimate was $34 billion. There will be at least a $25-30 billion loss.

Overeas investors have already sold; c. $11 billion 12-month rolling. CBRT data say non-residents’ bond holdings to total declined to 4.75 percent from 10.40 percent in late December.

Net exports have dropped visibly. The export coverage of imports dropped to 66.3 percent from 90.3 percent in •ctober – in 6 months. The 4M 2020 print points to a $19 billion trade deficit.

Residents are far from confident about the exchange rate. True, both the amount and the ratio to M2 of residents FX deposits flattened for a while but they are rising again.

China is entering a second wave of epidemic perhaps, and Europe can’t truly cope with the economic consequences of the outbreak due to its non-federal fiscal institutions.

Fed policy is the only explanation. There will be another $3 trillion rescue package there, and the Fed provided perfect foresight until 2022, something it didn’t in 2009.