Central Bank of the Republic of Turkey (CBRT) was to reinitiate regular FX (foreign exchange) purchase tenders. However the announced statement was different than those in the previous FX purchase tender announcements. According to this, the bank could purchase extra FX when deemed necessary. In regular FX purchase tenders, it was known in advance the quantity the bank will purchase and when the purchase will be made. But this time the bank stated that it can carry out 'irregular' purchases. Evidently, the bank says in a way that it can intervene. In fact, the bank could have intervened anytime desired even before. But this time it reminded everyone of this possibility with a strong emphasis. We can say that the bank has broken the routine slightly. This way, everyone started to wonder what the Central Bank planned to do. Let me put the principle: It is a good thing that which action the Central Bank will take in the FX market is not certain. It is even better in the current milieu. We sure live in an interesting period. Let us see why.

We had better read this decision not as an individual phenomenon but at the global scale in the light I recent developments.  There is chaos all around and now the CBRT has a new instrument to tackle with the chaos. In August Russia imposed a new tax on automobile imports. Putin's mind was crystal clear about what to do: One seeking to benefit from the domestic market should have founded production plants and generate employment. Those willing to share the strong domestic market in Russia should have agreed to pay a cost for it. The week before, US Congress made a decision about China. It was directly related with the world trade and exchange rates. According to this, the change in the value of Chinese Yuan against US$ will be closely monitored. Should Yuan continue to depreciate; US will raise the import taxes imposed on Chinese goods. The purpose of the US was the same with the purpose of Russia. US government tried to protect the domestic market. Those willing to benefit from the US domestic market had to be prepared to take some steps to this end. They had to be prepared to take steps about exchange rate. At appears that the protectionist trends which gained prominence with the tightening of world trade will intensify through the debates on exchange rates.

The story does not end here. Japan recently intervened in the FX market. By the way, FX market interventions in Japan are carried out directly by the Ministry of Finance. It was the Ministry of Finance, either this time. Why is this so? Japan had a foreign trade deficit for the first time over the last 36 years. Why? Experts of the issue give two reasons why: First is the tightening of world trade along with the 2008 crisis and the second is the appreciation of Japanese Yen. Why did Yen appreciate? It is definitely because things are on track in Japan. Japanese government therefore directly intervened in the currency. The same thing happened also in Korea. Won started to appreciate along with the "Korea will maintain the impressive export performance" discourses. So, what did the government do? It said "Then I will intervene in this." And the movement stopped, for now at least.

The world is not the same anymore. Now, the success is punished even more rapidly. Why? The number of countries which could retrieve what was lost during the 2008 crisis is quite low. As the figures for the second quarter suggest, Turkey ranked the twelfth. And the countries that succeeded a recovery in foreign trade performance can be counted on the fingers of one hand. What happens then? Everyone becomes more and more jealous about the domestic market. Let this be the first point to state: In this milieu, exchange rate might be subjected to more intervention. And capital flows take place towards the limited number of "successful" countries.

So, can we develop a global exchange rate regime in this milieu? We are not at that stage, yet. Right before the change in the exchange rate system, fixed exchange rate regime was implemented. 25 consecutive devaluations in a short period of time was the shape of things to come. So, I guess we are not at that stage, yet. We should first see 25 interventions in exchange rate and then talk about this possibility.

My point is this: Given the current climate that the CBRT implicitly declares it will assume a more interventionist attitude can be read as the declaration of the Korean government. It breaks the routine. It confuses our minds. An in fact, it should be so.

Given the current climate, it is a good thing that the Central Bank of the Republic of Turkey disturbs the routine of the market with respect to exchange rate. And it is even better that it is not predictable what action the Central Bank will take with respect to exchange rate. Exchange rate is a phenomenon which is the concern of the arts department of the central banks. So, now it the time for arts.

And this is not an easy task to achieve, for sure.

This commentary was published in Referans daily on 05.10.2010