Rates soar for Turkish lira in long-dormant offshore swap market

Credit: REUTERS/MURAD SEZER

Rates soared to 850% Tuesday, the highest in more than a year, in an offshore swap market for Turkish lira that analysts said was being further starved of liquidity by state banks, signaling more volatility for the currency after a turbulent week.

Updates lira swap rate, adds analyst comment

ISTANBUL, Aug 4 (Reuters) - Rates soared to 850% Tuesday, the highest in more than a year, in an offshore swap market for Turkish lira that analysts said was being further starved of liquidity by state banks, signaling more volatility for the currency after a turbulent week.

The interest rate on overnight swap trades in the London market TRYCCSONZ=R was at its highest since March of last year, according to Refinitiv data. It was 30% late last week, when the lira touched a record low spot price against the euro.

After a very stable two months thanks to costly state interventions to sell billions of dollars, the lira was hit by a burst of selling and volatility last week reflecting concerns over depleted reserves and Turks buying hard currencies.

After a separate lira selloff in March and April last year - when the overnight swap rate hit 1,200% - Turkish authorities directed state banks to curb trading in the London market that was once widely used for hedging and shorting.

It had remained largely dormant until Tuesday when rates spiked, even as the underlying lira price was mostly flat.

Piotr Matys, senior strategist at Rabobank, said it appeared Turkish authorities are trying to discourage betting against the lira by making the market as expensive as possible.

"It may buy them a little time but it is a confirmation of how vulnerable the lira is that they have to re-use such drastic tools," he said.

In April, Turkey's BDDK banking watchdog targeted the London market by slashing the limit for banks' forex transactions with foreign entities to 1% of their equity, from 10% previously.

The lira TRYTOM=D3 - which touched a record low against the dollar in May - had hovered around 6.85 for two months before weakening briefly beyond 7.0 last week. It was largely flat at 6.9500 at 1041 GMT Tuesday.

"A break above 7 is probably only a matter of time unless the outlook for the Turkish economy improves significantly over the next few months and inflation surprises on the positive side," Matys added.

Inflation dipped a bit more than expected last month, official data showed.

(Reporting by Nevzat Devranoglu and Ali Kucukgocmen; Editing by Dominic Evans and Jonathan Spicer)

((ali.kucukgocmen@thomsonreuters.com , @alikucukgocmen; +902123507067; Reuters Messaging: Reuters Messaging: ali.kucukgocmen.thomsonreuters.com@reuters.net))

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