Graphic: Markets see more Turkish lira losses and more cenbank moves to support it

© Reuters. FILE PHOTO: Turkish Lira banknotes are seen in this picture illustration

By Karin Strohecker and Marc Jones

LONDON (Reuters) – Turkey’s lira is in the grip of one its worst routs of modern times but markets are sensing more weakness ahead and could push authorities to do more than this week’s 3 percentage-point rate hike to turn the tide.

Roiled by problematic politics, big deficits and double-digit inflation, the lira is heading for its worst week and month in almost nine years.

Since the start of the year it has lost 20 percent against the dollar and, as the charts below indicate, pressure points remain.


The modern lira’s biggest-ever slump was a 36 percent drop over roughly six weeks at the height of the 2008-09 global financial crisis. This current plunge, which really started snowballing last September, now amounts to 31 percent.

If the lira doesn’t stage a fightback in coming months, this will be its sixth straight year of losses. It is also the most undervalued of major emerging currencies in real effective exchange rate (REER) terms – which measures it against the currencies of trade partners, adjusted for inflation.

Technically the lira’s all-time REER low was in October 2001. Renaissance Capital says this equates to 5.16 per the dollar in today’s prices. Before Wednesday’s 3 percentage point emergency rate hike, the lira spot rate had been close to crossing the 5-per-dollar threshold.

“We think Turkey could breach that (5.16 level) if it had a growth and banking crisis,” said Renaissance’s chief economist Charles Robertson.

To view a graphic on Emerging Market Real Effective Exchange Rates, click:


Futures, options and derivatives markets are still flashing warning signs for the lira.

The cost of hedging against big lira swings using volatility options on Friday was moving back toward the 9-year high hit on Wednesday before the central bank jacked up rates. Traders only make money on these if the currency moves by more than the priced level. That points to big moves, though it could be in either direction.

One-year risk reversals , a gauge of puts (sells) to calls (buys) on lira and a medium-term measure of the currency’s outlook, are nearing their highest levels since Jan 2017.

Shorter-term three-month risk reversals indicate similar stresses, while one-year forwards are quoted at a 15 percent premium to the current dollar/lira spot rate.

To view a graphic on Turkey Cross Currency Swap Rates, click:


The signals from Turkey’s interest rate markets are tricky to decipher with any accuracy in the current maelstrom, but the picture that emerges is that while the scale of Wednesday’s rate hike may not be repeated, there will be at least one more tweak.

Three-month ‘forward starting swaps’ – an indicator of what money markets expect to be charging for three month-funding in three months time — are at 17.15 percent — up a bit on Turkey’s top ‘late liquidity window’ rate after this week’s policy tightening .

“It looks like the market is pricing in another 50 basis points hike in the next three months, said Standard Life (LON:) Aberdeen fund manager Kieran Curtis. “So another little tweak.”

This week’s move is a reminder too that Turkey is no stranger to emergency rate hikes. It cranked up rates in a midnight emergency meeting in January 2014 after the lira tumbled more than 7 percent in 10 days.

Another option that would be welcomed by markets but is not apparent in pricing would be to pull the three different interest rates closer together. It has long been talked about and would make it easier for the central bank to control the market.

To view a graphic on Turkey Interest Rate Hike 2014 and 2018, click:


The rout in the lira has spilled over to the cross-currency basis swap markets – a rough indicator of the availability of U.S. dollar funding in domestic currency markets.

One-year Turkish cross currency swaps – a tool used by financial institutions to offset both exchange rate and interest rate risk – surged to a record of nearly 18 percent this week.

This is up more than 300 basis points since the start of the month – indicating the rush to secure dollar funds. Having tracked the lira quite closely until May, cross-currency swaps have deteriorated at a faster rate than the lira itself this month.

Cross-currency swaps were in the spotlight during the 2008 global financial crisis and the eurozone crisis when banks used derivatives markets to secure overnight funding if they had been locked-out of the traditional wholesale money markets.

A rise in these swap rates indicate financial institutions are paying a premium to secure dollar funds and translates into increased pressure on the local currency, in this case the lira.