2023-11-17T06:14:32+00:00
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/ The unusual stability of the low value of the Turkish currency attracts the interest of so-called interest traders, a type of investor who borrows money at low interest rates and seeks to invest it in other areas that achieve high returns.
While the Turkish lira has been losing value at almost record levels over the past three months, its daily losses have been contained within a very narrow range, and the rate of decline has reached just over 0.1%. As a result, one-month implied volatility, a measure of expected price fluctuations in a currency, fell below 10% this month to approach the lowest level since the beginning of 2023.
This decline in currency volatility, when combined with rising yields on Turkish bonds, provides an attractive offer for interest trading, according to Emre Akcakmak, senior advisor at East Capital in Dubai.
“Some investors are now reconsidering their old plans,” Akcakmak said, describing the lira as showing “moving exchange system-like behavior,” referring to a government policy that only allows gradual changes in the currency. He explained that it is also worth noting “the shift in dynamics, as returns on short-term investments now exceed recent changes in the lira’s exchange rate against other currencies.”
The lira rises in real terms
This means that investors can now gain more from short-term Turkish bonds than they lose from a devaluation of the currency. At the same time, cumulative monthly declines in the currency have become less than monthly inflation since August, meaning the lira is appreciating in real terms. While the government has not announced that attracting foreign capital through interest trade deals is part of its policy, Finance Minister Mehmet Simsek, a banker who previously worked at an investment bank, said earlier in November that ensuring the real appreciation of the currency is at the core of its approach. .
Analysts at Barclays expect the lira’s depreciation to continue at a pace that “stabilizes the currency’s real effective exchange rate,” which is calculated by inflation differences between a country and its major trading partners. However, at the moment, Barclays also estimates that the lira will fall more than investors will gain, making the interest trade unattractive. By contrast, analysts at Goldman Sachs believe that “the lira could rise beyond the high risk premium next year as real interest rates turn positive.”
Change policies
Interest trade deals on Turkish assets, once a favorite of emerging market investors, were abandoned years ago after officials in Ankara imposed a series of measures aimed at curbing lira short-selling. After elections in May, President Recep Tayyip Erdogan appointed a team of economic officials supporting market policies led by Simsek and Central Bank Governor Hafiza Ghaya Erkan, who also worked at an investment bank.
Members of the new economic team gradually scrapped previous rules in an attempt to restore investor confidence. But among the obstacles to attracting money to Turkey again are the low level of its foreign exchange reserves and prolonged high inflation that may force further interest rate hikes. However, the biggest concern among investors is the implementation of inconsistent policies over a decade, and the potential for recent changes to be abandoned for a more traditional approach.
Erdogan: Türkiye will slow inflation by tightening monetary policy
With currency market trading volume low by historical standards, state banks have become the main source of foreign currency for Turkey’s $900 billion economy, effectively giving them the power to set prices.
The Turkish currency has fallen by about 35% since the beginning of 2023, the largest rate of decline in emerging markets after the Argentine peso. Deutsche Bank and BNP Paribas joined JPMorgan this week in betting on an improvement in the Turkish bond market, which witnessed the exit of about $70 billion over the past decade.
Bloomberg