Lira Rebounds as Turkey Central Bank Moves to Allay Market Fears

(Bloomberg) --

The Turkish lira rebounded, recouping losses after its worst day since a crash last year, as the central bank raised rates borrowing costs and signaled it was taking steps to bolster its foreign currency reserves.

The currency held on to its 2.1 percent gains after policy makers forced commercial lenders to borrow from the overnight funding window at 25.5 percent by withholding funding from their benchmark repo, a move that could raise rates by 150 basis points over the course of a week. The regulator also didn’t provide banks any foreign-currency financing through its daily one-week swap auction, which may potentially add as much $2.5 billion to its coffers this week -- the amount currently outstanding on the facility.

“Suspending these auctions is counter intuitive on days like these, but presumably this decision aims to protect net reserves,” said Inan Demir, an economist at Nomura Plc. in London. “However, if the pressure on the lira does not abate, the next step can well be to resort to late-liquidity window again, if not for the entire funding needs of the system, partially at least,” he said, referring to the bank’s most expensive funding window at 27 percent.

Policy makers have been seeking to end speculation that the regulator was using its foreign-currency stockpile to support the lira before the March 31 elections. The lira fell more than 5 percent on Friday as data last week showed official reserves unexpectedly fell by the most since January 2014 in the first two weeks of March. It strengthened as much as 3.4 percent earlier today to 5.5711 per dollar.

The currency’s one-week implied volatility, which captures the municipal elections on March 31, extended its advance on Monday to the highest level since October. Its jump on Friday was the biggest since 2004. The overnight-swap rate implied by forwards surged to over 50 percent, the highest level since 2002.

Dollar Demand

The central bank said on Monday it was determined to accumulate reserves and reiterated its pledge to maintain price stability. On Friday, a central bank official said the draw in its foreign currency stock pile wasn’t anything out of the ordinary and over the weekend regulators started investigations into JPMorgan Chase & Co. and other banks for stoking the lira’s drop.

Last week’s meltdown comes after local investors accumulated around $25 billion of hard currency since September, a hedge against runaway inflation and uncertainty over the direction that policy will take after the vote. President Recep Tayyip Erdogan warned on Sunday that bankers deemed responsible for speculating against the currency would be punished.

“If you are soaking up foreign currencies from the market and engaging in provocative actions,” there will be “a heavy price for that,” Erdogan said on Sunday in televised remarks during an election rally in Istanbul.

©2019 Bloomberg L.P.