“Turkish FX implied interest rates have gone sky-high. The O/N rate has surged above 1000%,” note TD Securities analysts and add: “The cause of the move higher seems to be that Turkish domestic banks, for whatever reason, are not lending TRY offshore. This has pushed borrowing costs through the roof.
Key quotes
“Domestic borrowing costs have moved more modestly higher since the CBRT announced the suspension of 1-week repo auctions last Friday. The dislocation in the market seems to relate to a desire from the Turkish authorities to prevent TRY weakness ahead of the 31 March local elections.”
“The current dysfunctional market is unsustainable. We suspect that things will return to relative normality after the election. However, reputational damage is associated with recent events. This will dissuade investors taking any positions, long or short, in the currency.”
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