Turkish Lira Slides as Foreign Investors Leave

(Bloomberg) -- The Turkish lira weakened as a liquidity squeeze that had pushed up the cost of shorting the currency began to ease.

The currency weakened as much as 1.6% to 6.7112 per dollar early in the London session, erasing almost all of Thursday’s gains, after the overnight forward implied yield -- the price foreign funds pay to borrow the currency and sell it in the future -- fell more than 45 percentage points to 8.4%.

Short-term funding costs in offshore markets had spiked to as high as 69% this week, a sign of heightened demand to finance positions betting against the lira. The move was compounded by a lack of liquidity as authorities limited foreign investors’ ability to speculate against the currency by effectively barring local banks from providing them with liras.

Yet the currency is coming under renewed pressure amid an exodus of capital, and despite a concerted effort by state lenders to flood the market with dollars even as central bank reserves decline. That’s raising concern that Turkey is wasting its ammunition in propping up the currency while economic headwinds from the coronavirus pandemic mount.

“Continued downward pressure on reserves, and continued weakening in the lira despite what is evident friendly bank intervention, should be a major concern for policy makers,” said Timothy Ash, a strategist at Bluebay Asset Management in London. “Other EM central banks are not blowing scarce FX reserves as quickly as Turkey.”

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