Turkey’s lira is caught in a tug of war between foreign investors who cheered a big rate rise and government reform promises, and locals who remain cautious and are stocking up on gold and dollars. The currency has had a volatile month after being the laggard this year across emerging markets. Whether it can avoid new record lows will help to determine the success of President Tayyip Erdogan’s pledge of a new market-friendly era for the economy. The lira soared some 12% after Erdogan replaced the central bank chief and finance minister in a shock overhaul early this month. In the following week, foreigners snapped up $5 billion in Turkish assets, based on bankers’ calculations. But it slid back 5% this week as Turks and local companies stepped in to buy $2.5 billion in hard currencies at what was seen as a discount, and bankers say larger firms may be in the market for hard currency to meet rising foreign debt obligations. FX holdings in Turkey have never been higher at $228 billion and a big reason is imports of some $22 billion of gold this year – a favourite store of value for Turks especially in uncertain times. “The people are buying gold after selling their cars or houses, or just bringing their money to keep it as gold,” said Mehmet Ali Yildirimturk, a shop owner in Istanbul’s Grand Bazaar and deputy head of a city gold shops association. “The pledge of economic reforms created an optimism in the market, but these promises need to be fulfilled with actual steps,” he said. Erdogan has long blamed foreigners and high interest rates for two bad economic slumps and a more than 50% drop in the lira’s value since early 2018. The president’s rhetorical pivot this month – on both foreigners and interest rates – comes after a series of record lows in the currency and as the central bank’s FX reserves dwindled. PENT UP DEMAND Turkish authorities have begun untangling restrictions on offshore investing, including limits on FX-to-lira swaps, that were adopted last year amid distrust of foreigners. But changes will happen only slowly given tens of billions of dollars are tied up at the central bank to shore up reserves. That leaves a bottleneck of demand from foreigners who can access only about a 10.5% yield on Turkish assets in a London swap market even after Turkey’s central bank raised its policy rate by 475 points to 15% last week. “We are definitely seeing a more orthodox policy mix (and) taking these changes cautiously as a positive,” said Kieran Curtis, EM portfolio manager at Aberdeen Standard Investments, which after long staying away bought Turkish assets this month. He said another rate hike next month of 50 basis points would be “sensible” and could keep foreigners interested. The foreign inflows could help to keep Turkey’s ballooning current account deficit in check after coronavirus fallout cut tourism revenues by about $20 billion. The gold surge adds to the trade imbalance and the risk of foreign debt defaults, according to credit ratings agencies and other analysts. The central bank expects gold imports to reach $24 billion by year end, more than twice the average. A wealth manager at one Turkish bank said clients have been urged to go long on the lira since Nov. 6. “But as we can see … locals did buy around 4 billion worth of gold and FX in just two weeks,” the person said, requesting anonymity.