Turkish Lira Trampled In High-Yield Exit

The Turkish lira slumped against the U.S. dollar last week, after the Federal Reserve's rate rise sent fx investors rushing to exit high-yielding emerging-market currencies.

  • 19 May 2006
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The Turkish lira slumped against the U.S. dollar last week, after the Federal Reserve's rate rise sent fx investors rushing to exit high-yielding emerging-market currencies. Implied volatility on the pair jumped to 30% during trading last Monday, up from 10% as the lira dropped 13% of its value in eight trading days. As DW went to press it was trading at TRY1.45.

The U.S. rate rise put pressure on carry trades, sparking the rush to pull out of Turkish lira positions, as well as other emerging-market currencies. In the case of the lira, noted one trader, "There's not enough liquidity for an orderly exit." Most liquidation was from long cash positions, rather than option plays, but the sharp spike in volatility suggested some fx players may have been caught short by the spot move.

In spite of the high option prices, dealers said it seemed some houses were still willing to buy any options on the cross, mostly ranging from one month to three months, to buy volatility. Option buying gained momentum later in the week, as implied volatility steadied, sticking around 17% Tuesday and Wednesday. For fx players with the view the lira's 13% slide is just the beginning, buying downside lira options or straddles to capture the pair's volatility makes sense, explained a trader in New York.

Elisabeth Gruie, fx strategist at BNP Paribas in London, said it expects the Turkish lira to recover in the longer term. The firm expects it to return to an equilibrium level of around TRY1.35 by year end, she added.

  • 19 May 2006

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1 Goldman Sachs 1,607.28 5 22.59%
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4 BNP Paribas 522.35 4 7.34%
5 SG Corporate & Investment Banking 444.17 3 6.24%