The cost of borrowing Turkish liras overnight in the offshore market surged to the highest level since March 2019 after heavy interventions late last week drained the supply of local currency.
The overnight forward-implied yield on the lira jumped as much as 1020 percentage points to 1050% on Tuesday as dollar sales executed by state banks, designed to prop up the lira, began to settle after a public holiday.
Last week, government-owned lenders flooded the market with foreign exchange, selling at least $2.5 billion, according to traders with knowledge of the matter. Investors who took the other side of those trades now have to deliver the local currency.
Foreign investors, however, have essentially been barred from borrowing from local banks — to deter short sellers — and don’t have access to the central bank funding. That means those without liras on hand have to borrow the currency in the offshore market, where supply is limited, driving up the rate.
In the past, shortages of lira liquidity have forced many foreign investors to dump their positions in local-currency bond and stocks in order to meet the obligations. Tuesday’s blowout is the latest example of the dislocations caused by a slew of measures adopted by authorities to stand in the way of currency deprecation.
Rather than raising rates or curbing the supply of credit, authorities have been leaning on state banks to bolster the lira with dollar sales. While the interventions stopped the Turkish lira from weakening too far beyond the psychologically important level of 7 per dollar, they’ve come at a significant cost.
Goldman Sachs analysts including Murat Unur in London estimate the central bank has sold $65 billion to bolster the lira through the end of July.
“This looks like another freeze in lira liquidity in offshore markets but isn’t filtering into spot markets too much as foreign investor sentiment has been practically obliterated by similar instances,” said Simon Harvey, a currency market analyst at Monex Europe Ltd.