Lira Slide Becomes One-Way Bet as Traders Test Central Bank

(Bloomberg) -- Shorting the Turkish lira is becoming one of the easiest trades in town.

The wager is simple: the central bank is going to hesitate to defend the currency by raising interest rates given President Recep Tayyip Erdogan’s explicit criticism of high borrowing costs. And that’s allowing hedge funds and other speculators to pile up one-sided bets against the lira as it extends one of the biggest declines in emerging markets this year, hitting record lows against both the dollar and euro.

While the monetary authority can halt or at least slow the pace of the lira’s depreciation, “it is also a well known notion among market participants that Governor Cetinkaya may have limited room to raise rates in the current domestic environment,” said Piotr Matys, a strategist at Rabobank in London.

The central bank has left its weighted cost of funding on hold this year, though has pledged to deliver further tightening if needed, having raised it by more than 400 basis points in 2017. But investors are concerned that the government will lean against such a move as it tries to boost growth, leaving the currency at the mercy of foreign capital flows.

Turkey’s current-account deficit widened to $53.3 billion in the 12 months through February, with the bulk of this shortfall financed by portfolio investment, the latest data show. The lira slumped more than 9 percent this year and fell to a record 4.1934 per dollar on Wednesday. Against the euro, it slid to an all-time low of 5.1938.

Losses in the currency accelerated as investors assessed the prospect of American military action in neighboring Syria. The Turkish military is embroiled in an operation against Kurdish militants in northern Syria and U.S. President Donald Trump’s warning of a missile attack highlights the NATO member’s precarious geopolitical position.

“The market is really short the lira,” said Guillaume Tresca, a strategist in Paris at Credit Agricole SA.

Investors are now demanding record levels of compensation to park their money in Turkey. The yield on Turkey’s 10-year bond jumped to an unprecedented 13.56 percent on Wednesday, extending a surge from a low in February to almost 200 basis points.

“It’s a vicious cycle of a weaker lira leading to further losses in stocks and also bonds, which in turn raises concerns about capital outflows and leads to even weaker currency,” said Matys.

To contact the reporter on this story: Constantine Courcoulas in Istanbul at ccourcoulas1@bloomberg.net.

To contact the editors responsible for this story: Ven Ram at vram1@bloomberg.net, Anil Varma, Neil Chatterjee

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