Deutsche Banks heralds carry trade in Turkish Lira is back

We turned bullish on the lira in late September on account of over delivery from  authorities in the shift towards more orthodox policy, attractive carry and a belief  that there was a strong incentive for authorities to keep the nominal exchange rate  stable near term to meet disinflation and de-dollarization goals. While USD/TRY  (USD/Turkish Lira) initially moved in line with forwards, in recent weeks it has undershot.

One of the most important bullish signals is the return of carry seeking inflows. Back  in 2021 these were sufficient, with an improved current account balance, to keep  USD/TRY stable for six months in spite of elevated inflation. It is difficult to precisely  quantify the scale of inflows, but three pieces of evidence stand out. First, there has  been a remarkable improvement in the CBT’s net reserves over recent weeks,  approaching USD 11bn excluding treasury FX deposits and gold valuation effects). If the central bank had not chosen to increase its net reserves, it is likely the nominal USD/TRY exchange rate would be some way below current levels.

Turkey scores 3 major foreign financing victories in a week


Second, local banks’ off balance sheet FX position, adjusted for CBT swaps, has  shown a significant jump, historically associated with carry inflows.

Third, volumes of local banks’ FX swap transactions has markedly increased.

Importantly, while offshore positioning is building, it is still way off levels reached  during previous episodes of the TRY carry trade. With levels of wider FX volatility  low and other high yielding EM central banks cutting rates, this in turn suggests that  carry inflows can continue to help TRY during a seasonally negative period for the

current account. Recent upside surprises to policy, including a larger than expected  hike at the last CBT meeting, as well as signs of rebalancing in macroeconomic  indicators, should also help.


Structurally, real valuations, especially given high inflation, and uncertainty about  next year’s municipal elections, continue to present risks. In the near term,  however, authorities deserve credit for a careful balancing of priorities between  disinflation, FX and reducing the share of KKM deposits. Another positive catalyst  would be relaxing restrictions on local banks’ offshore swaps exposure, hinted at  recently by the Finance Minister.

Restrictions have driven the cross currency basis  negative as local banks have run up against their limits due to onshore demand, in turn reducing the attractiveness of TRY implied yields. A further increase in rates at next week’s meeting would be another positive for the trade.

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Published By: Atilla Yeşilada

GlobalSource Partners’ Turkey Country Analyst Atilla Yesilada is the country’s leading political analyst and commentator. He is known throughout the finance and political science world for his thorough and outspoken coverage of Turkey’s political and financial developments. In addition to his extensive writing schedule, he is often called upon to provide his political expertise on major radio and television channels. Based in Istanbul, Atilla is co-founder of the information platform Istanbul Analytics and is one of GlobalSource’s local partners in Turkey. In addition to his consulting work and speaking engagements throughout the US, Europe and the Middle East, he writes regular columns for Turkey’s leading financial websites VATAN and and has contributed to the financial daily Referans and the liberal daily Radikal.