Shock jump in Dollar/TL after Central Bank rate cut: Was it intentional?

The Central Bank of the Republic of Turkey lowered its policy rate by 300 basis points to 43 percent on Thursday. However, immediately following the rate cut, markets witnessed unexpected volatility in the Dollar/TL exchange rate.

The Dollar/TL rate suddenly spiked to 40.89 at midnight. Although this sudden jump returned to normal within seconds, it caused confusion among investors.

Economist İris Cibre stated that the event centered on the classic swap mechanism performed every Thursday. The swap transaction is based on large funds entering a TL position on the last business day of the week to capitalize on high-interest swap transactions. While the plan is to close this position on Friday by buying back dollars, things went wrong this time. Cibre noted that the rate rose due to a lack of sufficient sell quotations in the market, saying, "Someone left the quotation empty :)"

THE LOGIC BEHIND SWAP TRANSACTIONS

Cibre explained the logic of swap transactions as follows: "A position is opened on Thursday with a Tom-Next transaction, and the swap matures on Monday. If the exchange rate increase on Friday does not exceed the 3-day interest return, the investor pockets the difference."

News Source: 12punto