Turkish Money Markets Face ‘Liquidity Squeeze’ After Lira Fall

Turkish Money Markets Face 'Liquidity Squeeze' After Lira Fall

Turkey’s money market showed signs of strain on Tuesday, a day after the chairman’s sacking of a respected central bank chief rattled investors and sparked heavy sales of the country’s assets.

The overnight offshore swap rate, the cost to investors of swapping currencies for the lira over a given period, climbed to 1,400 percent annualized on Tuesday, according to data from Refinitiv. It had fallen to 500 percent still high by 3 p.m. in Istanbul.

Analysts said the sharp increase was a sign that it was becoming more difficult for foreign investors to hedge their exposure to lira assets, unwind bullish positions or bet against the currency. The lira fell 14% on Monday, before ending the day with a decline of 7.4%.

“Foreign investors are trying to liquidate long pound positions in a rush this week following the unexpected development over the weekend of the company’s layoffs. [central bank] governor, ”said Onur Ilgen, treasury director of MUFG Bank Turkey. He said this had triggered a “significant squeeze on liquidity in the offshore lira swap market.”

“This is a short-term measure to reduce fluctuations in the lira abroad,” said Enver Erkan, economist at Tera Securities in Istanbul. ” The
The goal may be to make it harder for foreign institutions to find it to read.
or make it expensive read so that short positions are expensive. ”

He described the sharp rise in the overnight swap rate as an indication of “panic moves” in the short-term market. Similar conditions prevailed during the volatile periods of 2019 and 2020.

Erkan said freezing the funding market was unlikely to be part of formal government policy, but rather a more informal decision by local banks.

Timothy Ash of BlueBay Asset Management in London agreed that the measures would make it harder to bet against the read. He said this was hurting investors “already invested in Turkish Lira assets as it makes hedging and reducing exposure so costly”.

Another analyst at a major international bank, who asked not to be named, said he was “seriously concerned” that this was an attempt “not to provide enough liquidity to read it. not only to prevent speculators from betting against the lira, but more importantly to ban foreign currencies. investors to close their bullish positions on Turkish assets and considerably slow down the pace of capital outflows ”.

He said it would indeed be a “form of capital control”, which “would further damage Turkey’s reputation and not prevent the reading from weakening significantly in the weeks to come.”

Investor sentiment has been improving since November when Naci Agbal was appointed head of Turkey’s central bank. He had sharply raised interest rates in an attempt to slow inflation, which is running at around 15 percent. A 2 percentage point hike in the country’s key rate last Thursday also helped counter rising developed market yields, which dented the appeal of emerging market assets.

But President Recep Tayyip Erdogan ousted Agbal over the weekend and installed Sahap Kavcioglu, a little-known scholar who echoed the president’s unusual views that high interest rates cause rather than slow inflation. . The upheaval triggered a severe reaction from the market.

Turkey’s main stock index, the Borsa Istanbul 100, lost about a tenth of its value this week, while the banks sub-index fell about 15%.

The country’s pound-denominated debt remained under pressure on Tuesday, with the 10-year yield standing at 18.4%, down from 13.6% at the end of last week. A dollar bond due June 2031 traded at a yield of 7.36%, down from Monday’s highs but up sharply from Friday’s 6% level.


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