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( Includes lira rally, Goldman, CDS, updates rates)
By Ali Kucukgocmen, Nevzat Devranoglu and Jonathan Spicer
ISTANBUL, Aug 4 (Reuters) – Rate of interest on overnight swaps for Turkey’s lira hit 1,050%Tuesday, the highest in more than a year, in an overseas market that Turkish authorities have actually starved of liquidity as part of an expensive effort to enhance the currency.
Analysts stated a cash crunch and continued pressure from Ankara pressed the London market rate to its greatest since March 2019, reflecting one area of fallout from Turkey’s high-stakes effort to control FX trading.
While the spike in borrowing costs would normally signal rising threat, the lira mounted a late rally in the spot market and was up 0.8%at 6.891 against the dollar at 1746 GMT.
Rates in the offshore market – once commonly used for hedging and shorting by abroad investors who have significantly cut their stakes in Turkish assets – stood at 30%late last week when the lira touched a record low against the euro.
One banker stated cash was “uber tight” in the London market after a four-day Turkish holiday weekend. Another said “rates surge whenever there is some need” after a such a long duration of low volumes.
Turkey’s reserve bank and state banks have invested tens of billions of dollars to support the lira, information and computations made by traders show. If it can not restore depleted reserves quickly, Ankara risks more lira depreciation, greater inflation through imports and a swollen present account deficit, experts say.
The main bank’s guv repeated last week that reserves naturally change during times of tension such as a pandemic.
However Goldman Sachs predicted the bank would soon have to hike policy rates because of the thin buffer and falling currency, saying: “Attempts to keep the lira at certain levels are unlikely to work.”
During a lira sell-off in March and April in 2015 – when the overnight swap rate struck 1,200%- Turkish authorities directed banks to curb trading in the London market and have continued to tighten such guidelines this year.
The overseas market had actually remained largely dormant up until Tuesday when rates surged, Refinitiv data showed.
After an uncommonly steady two months around 6.85 versus the dollar, due in part to the expensive state interventions, the lira was hit recently by selling and volatility that showed some concern over Turks purchasing more hard cash.
The lira touched a record low against the dollar in Might and briefly traded beyond 7.0 last week.
” A break above 7 is probably only a matter of time unless the outlook for the Turkish economy enhances significantly over the next few months,” stated Piotr Matys, senior strategist at Rabobank.
Ankara appeared to be attempting to prevent bearish bets by making the London market as pricey as possible, he said.
Turkey’s primary share index BIST100 fell as much as 5%during the day as experts said financiers looked for lira liquidity. Turkey’s dollar bonds likewise fell 1.9 cents, while five-year CDS default insurance coverage closed at the highest since mid-May.
( For a graphic of the swaps rate vs area rate, click: tmsnrt.rs/ 3kciWKn)
Modifying by Dominic Evans, Alexander Smith, Alexandra Hudson
and Timothy Heritage