Lira Gains on Hopes U.S. Pastor Held in Turkey Will Be Released

(Bloomberg) -- Turkey’s lira gained the most among emerging markets amid speculation a detained American pastor could be released next month, ending a dispute between the NATO allies that has wreaked havoc on the currency.

A local court could free Andrew Brunson, currently under house arrest in the coastal town of Izmir, when he appears for a hearing on Oct. 12, the Wall Street Journal reported, citing Turkish officials it did not name. The lira also rose on speculation some short positions in the currency got squeezed out.

The U.S. imposed sanctions on Turkey in August over the pastor’s detention, and has threatened to follow suit with more punitive measures if he is not set free, compounding a 40 percent depreciation in the lira this year. Brunson was arrested in the wake of a 2016 coup attempt in Turkey and is being charged for aiding terrorist groups.

There are “somewhat promising signs from both U.S. and Turkish officials of late” and the Oct. 12 trial is now “much more of a 50/50 probability event than has been the case ahead of previous hearings,” said Henrik Gullberg, a strategist at Nomura International Plc in London, who suggested that investors take a long position in the Turkish currency using a dollar-lira put-spread option strategy.

The Turkish currency rallied as much as 1.6 percent to 6.1899 against the greenback, before trimming gains to 6.2226. The yield on the nation’s 10-year government bonds fell 21 basis points to 18.73 percent.

Nomura recommended a two-month dollar-lira put at 6.00/5.75 as aggressive Turkey’s central bank tightening “favors positioning for downside” in the cross. The central bank this month raised its benchmark rate by 625 basis points to 24 percent.

“As funding approaches a substantial 30 percent, it is going to be difficult to sustain outstanding TRY shorts,” Citigroup strategists including Luis Costa wrote in a note to clients. “The extremely high negative carry continues to squeeze short TRY positions.”

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, Keith Jenkins

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