The risks of future FX rate auctions

Just as Orhan Veli said: “These days of fine weather have devastated me.” Banks that joined the lira compromised future foreign exchange auctions held by the Central Bank (there was no de facto foreign exchange sale), have suffered for a while due to high foreign exchange rates. The value of the dollar was too high during auctions made through November and December and that led to a high foreign exchange rate for the due date. Naturally, the offers based on those calculations were high. That’s why the dollar exchange rate estimations of banks remained above the real foreign exchange rate in 33 out of 38 auctions which came due in early March.

Therefore, banks paid the Central Bank the gap between the foreign exchange rate they estimated and the real rate for these 33 auctions and for five auctions, the Central Bank had to pay. Banks paid TRY 4.1 million to the Central Bank for those 33 auctions.

What’s the s tuat on n auct ons that are com ng due?

There are 33 auctions whose due dates are ahead of us. Two of those auctions were due last week and the rest of them are due on August 27th.

Lira compromised foreign exchange auctions show us at least what banks are thinking in terms of future estimations for foreign exchange rates. Those estimations are not arrows shot at the moon; they are well worked estimations. When they make an offer, it’s not only due dates and the foreign exchange rate for those dates that are considered but also possible improvements and risks on which a final calculation is made for an estimation.

If the rate is below the banks’ estimation, i.e. the bank offers a higher rate, it has to pay the difference to the Central Bank. And that’s what happened in 33 out of 38 auctions.

So, let’s get back to auctions which are coming due. Even if circumstances on the offer date are decisive, the foreign rates calculated for due dates amount to estimations of the banks. There is always a risk.

Average fore gn exchange rate for every month

In six of 33 auctions due to date on March 12, offers were made last year. On those offers, the foreign exchange rate is high. There are two reasons for this: First of all, it was a long due date relative to the time of the auctions. Secondly, the rate was high when auctions were made and therefore the offered rate was naturally high due to a series of calculations.

Therefore, we cancelled those six auctions and searched for all offered foreign exchange rates in the 27 other auctions. These rates form a kind of foreign exchange rate estimation of banks. According to those auctions, the estimated average foreign exchange rate for March is 3.81, 3.85 for April, 3.87 for May, 3.91 for June, 3.97 for July and 3.99 for August.

Banks try to do their best to make low estimations in lira compromised foreign exchange auctions. If a bank gets a share of one million dollars from an auction where it offered a foreign exchange rate at four lira but the rate remained at 3.90 on the due date, this bank has to pay the central bank 10 kurus for each dollar, or 100,000 liras for every million dollars. If its estimation was above the rate on the due date, at 4.10 for example, the Central Bank pays 100,000 liras to the bank. Therefore, banks try to give a low rate in their offer while trying to get a share from the auction.

Auction offers follow a pattern from the highest to lowest rates. Therefore, though lower rates provide a greater chance to make money, it’s also riskier as the lower the rate, the lower the chance to receive a share from the auction.