Turkish lira’s swap rates see highest since 2001 economic crisis

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Photo by M. B. M. (Unsplash)

The Turkish lira’s overnight swap rate in London soared on Tuesday to 330 percent, and the weekly swap rate rose to 125 percent, according to Refinitiv Eikon data, the highest since an economic crisis in 2001, Reuters reported.

Last week, these rates stood at 22 percent and 24 percent, respectively.

Beginning late on Monday, Turkish banks started to keep lira swap market transactions in London well below a 25 percent limit set by the banking watchdog, four sources with knowledge of the matter told Reuters. It was not clear how much of the limit was being used.

Traders said this caused the unexpected hike in swap rates.

The Turkish lira firmed again on Tuesday in volatile trade, as a series of tweaks by the central bank succeeded in clawing back most of last week’s steep losses, even while expectations dimmed for interest rate cuts in the months ahead.

A measure of the lira’s implied volatility spiked on Tuesday to its highest weekly reading since September, when Turkey was in the throes of last year’s currency crisis that, at its worst, sliced some 30 percent from the value of the lira.

Turkey’s central bank kept two auctions shut Tuesday to underpin the lira against a growing tide over the last six months of Turks losing confidence and turning to foreign cash.

At 1217 GMT, the lira stood at 5.5079 against the US dollar, strengthening from Monday’s closing level of 5.5520. It had reached as much as 5.4650 in early trade after initially weakening to 5.5949.

The lira fell sharply on Friday and closed last week at 5.7625 to the dollar, its worst closing value since October. The selloff came just over a week before local elections across the country in which President Tayyip Erdogan is campaigning hard for his Justice and Development Party (AKP).

The government’s response at the weekend, including threatening bankers and investigating their foreign exchange operations, rattled investors in a way that could spell trouble for an economy in recession and reliant on foreign funding.

The yield on Turkey’s benchmark 10-year bond rose to 18.06 percent, from 17.35 percent on Monday. The main BIST 100 share index dipped 1.06 percent Tuesday after two days of losses.

On Monday the central bank made several tweaks to lira liquidity, chiefly halting funding through one-week repos at 24.0 percent, its policy rate. It also began lending at 25.5 percent from the overnight repo and depo windows.

Analysts said the tightening moves — called “back door” actions because the policy rate was left unchanged at 24 percent, where it has been since September — could dim expectations that the central bank will cut rates by mid year, as a Reuters poll in February predicted.

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