Turkey Central Bank Seeks to Repel Short-Term Carry Bets

Mint

a day ago

(Bloomberg) -- Turkish policymakers are taking steps to deter so-called 'hot money' flows into the lira, pushing back against one of the world's most lucrative currency bets.
While the central bank has kept a tight rein on the lira market and allowed the currency to slide gradually, traders say market moves have become less predictable lately. On recent Fridays in particular, the lira has weakened three to four times faster than the average pace on other days, according to Bloomberg calculations.
The accelerated Friday decline undercuts a popular short-term strategy that involves buying liras late on Thursday via overnight swaps to earn interest over the weekend, and then exiting the position on Monday. An exaggerated Friday drop in the lira can make those weekend bets unprofitable.
With central bank interest rates near 50%, Turkey has again become an attractive destination for so-called carry traders, who borrow funds in countries where interest rates are low and invest them in the assets of nations where rates are higher. Officials have been seeking to deter the shortest-term carry trades, fearing a spike in volatility should they be rapidly unwound, according to people familiar with the matter, who asked not to be named speaking about internal policies.
That happened this March, when the currency plunged 10% in a matter of hours after the shock detention of Istanbul Mayor Ekrem Imamoglu, the most formidable political rival to President Recep Tayyip Erdogan, who's governed Turkey for more than 20 years. That selloff was driven largely by foreign investors exiting their lira positions, Finance Minister Mehmet Simsek said at the time.
'The authorities are not very keen to draw short-term carry trade inflows,' said Erkin Isik, chief economist at QNB Bank in Istanbul. 'They saw the wide swings in the exchange rate and FX reserves amid rapid outflows from those trades,' he said.
The central bank declined to comment.
Goldman Warns World's Best Carry Trade at Threat From Lira Slide
The March selloff was ultimately contained with a resumption of interest-rate hikes, new measures aimed at reducing lira liquidity, and an increase to reserve requirement ratios on banks' short term liabilities abroad. A broader uptick in appetite for emerging-market assets is also helping after US President Donald Trump put some of his most aggressive trade tariffs on pause.
While the lira continues to steadily lose value against the dollar, the government has been pursuing a policy of real appreciation, meaning keeping losses below the rate of consumer inflation. With monthly inflation expected to slow, policymakers have been making the pace of real appreciation harder to gauge.
Turkish Central Bank Chief Defends Interventions to Bolster Lira
Since the steep drop on March 19, Turkey's lira is down further 3.3% versus the dollar.
Still, the trade remains profitable.
Carry-trade returns for the lira in May were the biggest since 2021, compensating for March's losses, according to a Bloomberg measure based on rolling one-month forwards. Inflows from carry trades amounted to about $3.4 billion since April 18 through last week, according to calculations by independent Turkish economist Haluk Burumcekci.
The trade is now generating profits for a fifth successive quarter, a winning streak that last occurred in 2012. But it's mostly driven by short-term capital inflows, or hot money, and very short-term bets — often lasting no more than a week, according to traders who spoke on condition of anonymity.
Morgan Stanley, Deutsche Bank AG and ING Groep NV recently renewed their recommendations for positioning in lira-denominated carry trades, while HSBC has advocated buying long-term local-currency bonds.
--With assistance from Ugur Yilmaz.
(Adds move in Turkish lira in 10th paragraph.)
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