On The Edge Of Collapse: Turkish Lira Plummets As Central Bank Burns Through A Third Of Reserves
The Turkish lira resumed its plunge on Thursday following a sharp rebound on Tuesday when Turkish authorities unleashed an unprecedented assault on lira shorts, helping push the TRY briefly higher ahead of regional elections, after a disappointing reading on the central bank’s net FX reserves stoked fears that the country was even closer to a full-blown currency crisis than investors had feared, while local accounts continued to accumulate foreign currency after overnight swaps on the Turkish Lira collapsed to just 40% from a historic high around 1,338% on Tuesday.
After nearly a week of chaos that one trader described as unprecedented in his two decades in the market (“I’ve never seen a move like this in the 21 years I’ve been watching the market“), it appears President Erdogan has relented, and following a vocal outcry from the international community which was effectively trapped in lira positions, both long and short, after overnight swaps hit rates well above 1,000%, on Tuesday the swap plunged as low as 18.5%, in line with recent historical prints, and an indication that after doing everything in its power to squeeze shorts (and longs) the central bank appears to have capitulated.
As we reported previously, bankers and analysts at large international banks reported that Turkish lenders appeared unable or unwilling to provide lira in exchange for currency this week, in an attempt to prevent short selling. While Turkey’s banking association (TBB) on Wednesday night denied claims that the country’s lenders had been limiting or halting sales of lira to foreign banks, one London-based analyst told the FT on Tuesday that Turkish banks told him they had been ordered “not to lend even a single lira to foreign counterparties” That squeeze sent the cost of borrowing lira soaring for foreign banks and hedge funds, although as shown above, it has since tumbled.
