Turkey: trading constraints “unprecedented”

With local elections just days away, Turkish authorities are taking “extreme” measures, as one investor puts it, to protect the value of its currency.

The cost to borrow liras offshore overnight soared past 1,000 per cent today, hitting as high as 1,337 per cent at pixel. That is triple the rate from yesterday, and leagues higher than the 23 per cent level seen last week:

Not a Bitcoin chart from 2017.

“It sends the signal that something is dysfunctional here, especially because the lira is still selling off despite this huge squeeze in the offshore market”, says Paul McNamara, an Investment Director focused on emerging markets at GAM. “This is unprecedented. I can't think of a parallel in emerging markets.”

And given the high levels of volatility, McNamara tells Alphaville there's a technical problem as well. People don't want to quote prices as to where the lira will trade in 2 weeks time, let alone three months.

The crackdown on short selling (high borrowing rates restrict shorts from executing the first part of the short-selling process) comes less than a week after the lira plunged roughly 5 per cent against the dollar, a move President Recep Tayyip Erdogan blamed on foreign investors.

At a campaign rally on Sunday, Erdogan threatened that those speculating against the lira, or even musing about its gyrations, would pay “a heavy price”. Turkish authorities have already made good on that promise. Both the country's capital markets board and banking supervisor announced over the weekend that they are investigating JPMorgan after its analysts advised clients to sell the lira. The advice was “misleading” and “manipulative,” officials said.

Another concern for McNamara is the dwindling stock of foreign exchange reserves at the country's disposal. The central bank's net international reserves fell $6.3bn in the two weeks ending March 15, the largest plunge since 2014 — a time when the lira was under pressure. Now, reserves sit at $28.5bn.

“If the central bank is again burning through its reserves, the situation starts to look appalling,” he tells Alphaville.

Should Erdogan's AKP party win on Sunday, some investors are hoping the government will ease up the pressure on foreign investors. Until then, expect more of the same, warns one international economist:

It is good to have someone to blame . . . a political scapegoat.
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