Turkey Central Bank Seeks to Repel Short-Term Carry Trade Bets
Turkish policymakers are taking steps to deter so-called ‘hot money’ streams into the lira, pushing back versus one of the world’s most rewarding currency bets.
(Bloomberg)– Turkish policymakers are taking actions to prevent so-called ‘hot money’ flows into the lira, pressing back against one of the world’s most lucrative currency bets. While the central bank has actually kept a tight rein on the lira market and permitted the currency to move gradually, traders state market moves have actually become less predictable recently. On current Fridays in particular, the lira has deteriorated three to 4 times faster than the average speed on other days, according to Bloomberg calculations. The accelerated Friday decrease undercuts a popular short-term strategy that involves buying liras late on Thursday through overnight swaps to earn interest over the weekend, and then leaving the position on Monday. An overemphasized Friday drop in the lira can make those weekend bets unprofitable. With reserve bank interest rates near 50%, Turkey has again become an appealing destination for so-called carry traders, who obtain funds in countries where interest rates are low and invest them in the assets of countries where rates are higher. Officials have been seeking to deter the shortest-term carry trades, fearing a spike in volatility should they be rapidly unwound, according to individuals acquainted with the matter, who asked not to be named when speaking about internal policies. That occurred this March when the currency plunged 10% in a matter of hours after the shock detention of Istanbul Mayor Ekrem Imamoglu, the most formidable political rival to President Recep Tayyip Erdogan, who’s governed Turkey for more than 20 years. That selloff was driven largely by foreign investors leaving their lira positions, Finance Minister Mehmet Simsek said at the time. ‘The authorities are not very eager to draw short-term carry trade inflows,’ said Erkin Isik, chief economist at QNB Bank in Istanbul. ‘They saw the broad swings in the currency exchange rate and FX reserves amidst rapid outflows from those trades,’ he stated. The central bank declined to comment. Goldman Warns World’s Best Carry Trade at Risk From Lira Slide The March selloff was eventually contained with a resumption of interest-rate hikes, new measures targeted at reducing lira liquidity, and an increase to reserve requirement ratios on banks’ short-term liabilities abroad. A broader uptick in appetite for emerging-market assets is also helping after US President Donald Trump put some of his most aggressive trade tariffs on pause. While the lira continues to gradually decline versus the dollar, the government has been pursuing a policy of real appreciation, meaning keeping losses below the rate of consumer inflation. With monthly inflation expected to slow, policymakers have been making the rate of real appreciation harder to calculate. Turkish Central Bank Chief Defends Interventions to Strengthen Lira Still, the trade remains profitable. Carry-trade returns for the lira in May were the largest since 2021, making up for March’s losses, according to a Bloomberg measure based on rolling one-month forwards. Inflows from carry trades amounted to about $3.4 billion since April 18 through last week, according to calculations by independent Turkish economist Haluk Burumcekci. The trade is now generating profits for a fifth consecutive quarter, a winning streak that last occurred in 2012. It’s mainly driven by short-term capital inflows, or hot money, and very short-term bets– often lasting no more than a week, according to traders who spoke on condition of anonymity. Morgan Stanley, Deutsche Bank AG, and ING Groep NV recently reaffirmed their recommendations for positioning in lira-denominated carry trades, while HSBC has advocated buying long-term local-currency bonds.– With support from Ugur Yilmaz. More stories like this are available on bloomberg.com © 2025 Bloomberg L.P.
