The lira rallied for a second session on Tuesday, hitting its strongest versus the dollar since … well … since Friday.
(Annotating the lira’s wild ride)
Wednesday’s rally comes after BDDK again moved to limit swaps, this time declaring transactions can’t exceed 25% of banks’ shareholder equity. That, just as Erdogan raised the stakes on Trump by slapping additional tariffs on U.S. imports including liquor, cars and rice.
This is the second time this week that BDDK has moved to curtail swaps participation. They tried this on Monday and what you should note is that while this may be somewhat effective in the short-term, it is yet another indication that when the central bank says it will take “all necessary measures” to restore FX stability, that does not include rate hikes.
The lira’s 10-day realized volatility was higher than that of Bitcoin through Tuesday.
1-month implied vol. on USDTRY has exploded.
On Sunday, Erdogan quite literally suggested that he will die before he gives up on his perverse economic doctrines. “As long as I’m alive, we won’t fall for the interest rate trap”, he insisted, before demonizing higher rates as nefarious tools that “make the rich richer and the poor poorer”. That doesn’t bode well for the currency.
Last week’s drop in the lira was the steepest decline since 2001, so if the currency were to somehow hold on to its Tuesday and Wednesday gains, that would be welcome news for Ankara.
At one point earlier in the session on Wednesday, the lira was the best performing currency in the world.
Amusingly, regulators in Turkey have now suspended mark-to-market for calculating capital adequacy ratios at banks. That suspension will last until prices return to “normal”. In other words: until prices for Turkish assets stop falling.
As far as Goldman is concerned, that might take a while. “In our view, the value created in the TRY alone is not enough to stop the sell-off in Turkish assets, and in the absence of more concrete policy steps the near-term risks are skewed towards more depreciation”, the bank wrote on Tuesday evening, before noting that their EM team “remains cautious on the currency and TRY forecasts are under review”.
It’s probably fair to say that everyone’s TRY forecasts are “under review”.