Turkey ramps up efforts to defend currency ahead of elections

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Ahead of local elections next Sunday, Turkish authorities are cracking down on speculative trading on the lira, driving up the cost of borrowing the currency in an effort to limit losses on the lira which plunged last week.

The Turkish lira dived 5 percent against the dollar on Thursday as a senior official said banks had started providing the currency to the London market again, after several days of authorities withholding liquidity to underpin the currency, according to Reuters.

As liquidity in the lira improved, the London overnight the cost of borrowing the Turkish lira - known as the swap rate - plunged to 50 percent from a crippling 1,200 percent a day earlier, Refinitiv Eikon data showed.

This presented a massive hurdle to foreign investors looking to bet against the Turkish currency, to hedge or to close out positions.

According to the Financial Times, Turkish banks have been ordered not to sell the lira to any foreign counterparties. Sources say Turkey will keep directing its banks to withhold lira liquidity from key foreign markets at least until after the local elections.

The Turkish banking association denied the reports in a statement to Reuters, saying lira swap rates were not surging due to banks withholding liquidity from foreign banks, rather because there was not enough lira for foreign banks to buy dollars, and that Turkey had shown the necessary stance against a speculative attack on the lira.

The surge in lira swap rates comes at an unsettling time for investors in Turkey, amid a government investigation into JPMorgan Chase, with authorities accusing the US Bank of ‘misleading’ investors by advising clients to sell the lira.

“What we have seen in the past week or so is a fairly desperate attempt by the Turkish authorities to support the lira in the short-term by making short-term funding in the lira almost impossible to achieve for both foreign and domestic parties,” Ranko Berich, Chief Market Strategist at Monex Europe told Al Arabiya in an interview. “It is in effect a rate hike through the backdoor,” he said.

Berich explained that the move by the Turkish authorities has supported the currency in the short-term by completely drying up the lira’s liquidity and tightening monetary policy without a formal interest rate hike, but that it has dented investor confidence in the Turkish economy in the longer term.

“It is a short-term measure that may prevent further depreciation in the immediate future but in the long run if you can’t hedge your exposure, your investors aren’t exactly going to be thrilled and made to feel more confident about the prospects of investment in Turkey,” Berich said.