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Lira Bears Retreat as Central Bank Works to Win Back Investors - BLOOMBERG
BY , Bloomberg News
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(Bloomberg) -- Demand for further bearish bets against Turkey’s lira is slowly evaporating as the central bank’s interest-rate hikes and other policy measures help shore up investor confidence.
The cost of hedging against declines in the lira over the next three months in the options market has fallen to the lowest since February 2021. Similar drops in these risk-reversal options — a barometer of market sentiment over the longer term — are being seen in six-month and one-year contracts, showing a lack of demand for positioning for a weaker lira.
“When inflation finally peaks in the first half of this year, dollar-lira may start trending lower, driven by Turkish real interest rates turning positive,” said Piotr Matys, senior currency analyst at InTouch Capital Markets Ltd. “It’s worth noting that a peak in Turkish inflation should coincide with major central banks led by the Fed cutting interest rates, which would make the lira potentially attractive for carry trade players despite still-lingering risks.”
While the lira has been sliding for years, heading past the psychological level of 30 per dollar this month to touch a fresh record low this week, the retreat in risk reversal options signals traders see a slower pace of declines. That’s already been playing out for a few months now, following a steep depreciation in the lira between June and September.
Read more: Moody’s Lifts Turkey’s Outlook to Positive on Economic Policy
Starting in June, the Turkish central bank — under new governor Hafize Gaye Erkan — raised the policy rate in big steps to 42.5% from 8.5%, while winding down previous macroprudential measures that had alienated foreign investors. While inflation accelerated to 65% in annual terms last month and it’s seen climbing further in the months ahead, the central bank’s projection is for deceleration to begin in the second half of 2024.
“The more conventional macro-prudential implemented by Ms. Erkan and the central bank have gone a long way to restoring investor credibility,” said Todd Schubert, a Dubai-based senior fixed-income strategist at Bank of Singapore. “There is more work to be done, and inflation is still too high, but investor confidence appears to be as high as it has been in quite some time.”
