Turkey’s surprisingly large interest-rate increase last week so far hasn’t significantly propped up embattled lira but it has cut the cost of insuring it against depreciation to the least in 17 months.
(Bloomberg) — Turkey’s surprisingly large interest-rate increase last week so far hasn’t significantly propped up embattled lira but it has cut the cost of insuring it against depreciation to the least in 17 months.
The spread in the premium on six-month options to sell the lira versus the dollar rather than buy the currency — known as the 25 Delta risk reversal — fell to 10.6%, the lowest level since March 2022.
The central bank hoisted its main rate by 750 basis points to 25%, spurring a sharp but ultimately short-lived rally in the lira. With inflation running at close to 50%, economists said hefty further tightening was needed to rebalance the economy, and it’s not clear if President Recep Tayyip Erdogan — who has a track record of changing central bank governors — will back these potentially painful moves.
“This bold monetary-policy decision clearly improved market sentiment toward the lira as reflected in the costs of hedging,” said Piotr Matys, a currency analyst at InTouch Capital Markets. “That said, many traders who have a long experience of trading the lira most likely are wondering how long it may last this time.”
The lira has weakened 30% against the dollar this year, most among emerging peers after the Argentine peso. The currency climbed 5.3% on Thursday after the hike and has since pared its gains to 2.4%.
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