Image Credit: Reuters

Istanbul: Lira traders braced for the results of Turkey’s local elections this Sunday following a week of turmoil that rattled faith in the nation’s markets.

While the currency slowed its slide, stocks gained and swap rates began to normalise on Friday, investors warned the volatility could spike again. Commerzbank AG analysts said they were struggling to gauge how much selling pressure would remain after the vote, which is seen as a key test of Turkish President Recep Tayyip Erdogan’s rule. TD Securities strategist Cristian Maggio predicted the lira could sink as much as 30 per cent in the second quarter.

“It’s not a market that I think is worth touching right now,” Timothy Graf, the head of EMEA macro strategy at State Street Bank & Trust, said in an interview on Bloomberg TV on Thursday. “It’s very difficult to short the currency at least, given how expensive that has become.” If investors decide to go long, the market can move against them very quickly, he said.

The lira’s whipsaw ride began last Friday after a surprise drop in central bank reserves prompted JPMorgan Chase & Co. to recommend investors sell the currency, amplifying its decline. Turkish regulators launched a probe into the bank over the weekend and limits designed to tame short sellers via offshore funding markets kicked in on Monday, propelling swap rates beyond 1,000 per cent and trapping investors in their lira bets.

Exodus Slows

While the restrictions helped the lira recoup losses at the start of the week, bonds and stocks sank as international investors dumped local assets in a bid to raise liras to offset their currency positions. Meanwhile, local traders sprang into action, scooping up dollars on the cheap and sparking a secondary drop in the lira that continued into Friday’s session.

For now, the exodus has slowed, swap rates are stabilising and the lira is down only 1.5 per cent compared with a slide of more than 5 per cent on Thursday. Other emerging markets like South Africa and Brazil are facing their own local risks and the rout hasn’t broadened.

But the offshore funding freeze has left many despairing and forced to tear up strategies in a market that can turn untraceable so fast. That’s not good for Erdogan who relies on foreign inflows to finance growth of the Middle East’s largest economy which entered into its first recession in a decade in the run-up to Sunday’s municipal elections.

“An adverse outcome for AKP would likely rekindle new market volatility next week,” Commerzbank analysts including Tatha Ghose wrote in a report, referring to Erdogan’s ruling AK Party. “It remains unclear how much selling pressure remains, which could unfold once the situation on the swap market will normalise completely.”