January 23, 2022
  • January 23, 2022

The Turkish Lira is the best yield crop and a “carry trade for the brave”

By on September 17, 2021 0

– TRY struggles after a scorching week for risky currencies
– But remains the undisputed world champion of yield
– Said to be an attractive “carry trade” for the brave
– As all eyes turn to September’s CBRT rate decision

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  • GBP / TRY reference rate at publication:
  • Place: 11.87
  • Bank transfers (indicative guide): 11.46-11.54
  • Specialist money transfer rate (indicative): 11.76-11.80
  • More information on obtaining specialized rates, here
  • Set up an exchange rate alert, here

The Turkish lira was near the bottom of the currency rankings on Friday and at the end of an almost scorching week for risky currencies, although it outbid all others with its yield offer to international investors and Credit Agricole l ‘reported as the number one’ trade ‘there.

The Turkish lira fell sharply against its ten most-traded emerging market counterparts in the week to Friday, a period in which the US dollar rose sharply against all competitors except the Indian rupee, the Russian ruble and the Indonesian rupee.

Global stock markets were down and oil prices had risen sharply, which is still a toxic cocktail for the currencies of major net oil importing countries like Turkey and may explain why other more favorable developments have been ignored by the market during the period.

Without the strength of the dollar and international risk aversion, Wednesday’s budget balance figures might have turned out to be a boon for the pound after Turkey’s undersecretary of the treasury announced a primary surplus of $ 54.49 billion from TRY for August.

This record surplus was achieved despite a 31.6% increase in spending over the period, and thanks to tax revenues that grew further and faster than spending; about 35% in total.

“The TRY carry is one of the highest in the EM. With a key rate at 19.0%, interest rates are soaring well above other high yield emerging market securities, such as RUB, INR and MXN. Combined with relatively low exchange rate volatility, this allows the TRY to stand out, ”explains Sébastien Barbe, strategist at Crédit Agricole.

Carry trade TRY

Above: Credit Agricole chart ranking emerging market currencies according to their relative attractiveness in terms of yield.

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Barbe and his colleagues have cited the read’s carry / volatility ratio to view it as an attractive income prospect for bank clients who have sufficiently high risk tolerance levels.

The ratio uses expected levels of currency volatility derived from option market prices to qualitatively categorize currency yield offers more accurately, as currency volatility can easily eat away at the interest yields paid by sovereign bonds and business.

On this measure at least, the Turkish lira is the undisputed champion of the world due to both the 19% treasury rate of the Central Bank of the Republic of Turkey (CBRT) and the relatively low levels of currency volatility achieved and expected by the market in recent months.

“That’s why we think this is an interesting carry trade, but only for the brave. The risk would be a significant drop in rates too quickly, ”explains Barbe. “On top of that, there have been some favorable improvements in terms of the balance of payments lately.”

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But an attractive interest yield isn’t the only factor that has supported the pound in recent times, as CBRT’s foreign exchange reserves also fell from $ 49 billion in May to $ 78 billion in August. after the central bank signed currency swap agreements with the People’s Bank. of China and the Bank of Korea.

The CBRT also surprised its skeptics under new Governor Şahap Kavcıoğlu by keeping the cash rate stable at 19%, although there are risks that this could be reduced sooner than expected by financial markets, which, according to many analysts, would be negative for the currency.

Barbe’s assessment and budget data this week came within days of the CBRT’s decision on interest rates next Thursday and it is even more than usual a landmark event for the Turkish lira and the ‘economy.

“The lira made slight gains against the US dollar following the CBRT’s decision to increase the foreign exchange reserve requirement ratio from 2 pp to 23% for deposits less than one year old and 17% for those over a year. A surprise rate cut by the CBRT next week could worsen sentiment, ”warns Kenneth Broux, currency strategist at Societe Generale.


Above: USD / TRY displayed at daily intervals alongside GBP / TRY.

Every central bank event is still important to a currency and its related financial markets, but even more so with the pound after the damaging cycle of apparent policy intervention by the central bank looking for lower interest rates seen in recent years. years, which caused repeated episodes. strong currency depreciation and higher inflation rates than the CBRT wanted.

The last massive sell-off came in March and came in response to Ankara’s sacking of the predecessor of the current governor Şahap Kavcıoğlu, which raised concerns in the markets that the bank could quickly embark on a new round of rate cuts. interest before the flare-up of nascent inflation in Turkey contained.

So far, the bank has maintained a firm hand, but the forex market will inevitably wait anxiously next week to see if this approach will continue, while some observers may have been put off by such expectations by indications. that the inflation targeting strategy could change.

“Turkish central bank governor Sahap Kavcioglu has indicated that core inflation, rather than headline inflation, may gain in importance as the CBRT sets monetary policy,” said Mathias Van der Jeugt, head of research at KBC Markets in Brussels.

“Until recently, the governor of the CBTR indicated that the bank intended to keep the key rate above the rate of inflation. The August CPI data released on Friday was printed at 19.25% year-on-year for the main CPI, but the core CPI rose from 17.25% to 16.76%, ”Van wrote. der Jeugt in a note at the beginning of September.