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Is Turkish lira carry trade losing steam?

Is Turkish lira carry trade losing steam? U.S. dollar, euro and other banknotes are seen in front of displayed stock graph in this illustration taken, February 8, 2021. (Reuters Photo)
By Newsroom
Jun 28, 2024 10:52 AM

The Turkish lira strengthened this month, with the dollar rising to ₺32.97 on Friday. This marks a 2.2% increase for the lira since the beginning of June. The narrowing gap between London Overnight Turkish lira rates and Central Bank of the Republic of Türkiye (CBRT) rates is contributing to this trend.

The “carry trade” return has also fallen to 0.85% in June, down from 4.2% in May. This decline is attracting foreign investors to Turkish bonds and longer-term investments.

As the markets close out trading for June, the first-half financial report for 2024 has also been released. Following a period of stability after the March 31 local elections, the Turkish lira saw a slight increase against the dollar this month. The dollar closed at ₺32.97 on Friday, up 2.2% from its May close of ₺32.23.

$20B through carry trade

While carry trade operations, where investors borrow in low-interest currencies to invest in higher-yielding Turkish lira, recently attracted $20 billion in short-term foreign capital, June witnessed significant development. The six-month Turkish lira carry trade return remains at 12%.

Rapid decline in monthly returns

April’s 3.88% and May’s 4.20% “carry trade” returns plummeted to 0.85% in June, influenced by modest exchange rate increases and the narrowing gap between the London Swap Market and central bank rates. This reduced the appeal of carry trade operations.

Dollar exchange rate

The interbank market opened with the dollar at ₺32.97 on Friday. Currency exchanges range between ₺32.73 and ₺32.83 for buying and selling. This week, the dollar tested above ₺33, maintaining a steady trend, while the Euro traded at ₺35.17 and the pound at ₺41.51.

Foreign bonds

Meanwhile, foreign investor inflows through bonds into Türkiye have reached significant levels. Over 13 weeks from March 29 to June 21, foreigners bought $8.9 billion in bonds, shifting focus toward longer-term foreign investments over “carry trade” operations.

CBRT’s key message

The CBRT left its policy rate unchanged on Thursday, as expected by analysts. Despite holding rates, the bank signaled a potential shift toward tighter monetary policy in the future due to rising inflation concerns.

It also hinted at measures to address excess Turkish lira liquidity, which helped maintain market confidence. With the full impact of summer on inflation yet to be seen, the bank’s decision suggests a wait-and-see approach for the immediate future.

Last Updated:  Jun 28, 2024 10:53 AM