Sudden spikes in Dollar/TL on Fridays: Is the Central Bank putting the brakes on short-term capital?

While the Turkish lira has continued to see a real depreciation in recent months, notable exchange rate movements have been occurring on specific days of the week. In particular, sudden spikes in the dollar/TL exchange rate are being observed on Fridays. Bloomberg has suggested that this movement is not coincidental and may be a deliberate move by the Central Bank (CBRT) to limit short-term hot money inflows.

The analysis published by the US-based financial agency pointed out that the depreciation of the TL on Fridays is three to four times higher compared to other days of the week.

OBSTACLE TO CARRY TRADE STRATEGY

According to Bloomberg's analysis titled "CBRT aims to repel short-term carry trade transactions," the sharp depreciation on Fridays undermines a popular carry trade strategy that aims to generate short-term interest income through the TL.

In this strategy, investors plan to buy lira on Thursday evening, earn interest over the weekend, and exit on Monday. However, the sharp exchange rate increases on Fridays make this transaction unprofitable.

TL IS AN ATTRACTIVE TOOL FOR CARRY TRADE

With the policy rate in Turkey approaching 50 percent and a relatively stable exchange rate under the control of the Central Bank, the Turkish lira has become attractive for carry trade. Indeed, carry trade returns reached their highest level since 2021 in May.

The amount of hot money entering the country through this method since April 18 has reached 3.4 billion dollars.

OFFICIALS ARE CONCERNED ABOUT VOLATILITY

According to sources who spoke to Bloomberg on condition of anonymity, officials are concerned about the potential risks of short-term capital inflows. It is stated that such capital movements are not encouraged due to the volatility they could create in the markets.

QNB Bank Chief Economist Erkin Işık made a similar assessment, stating, "Officials are not very eager to attract short-term carry trade inflows. They have previously experienced that rapid exits through this channel lead to fluctuations in exchange rates and reserves."

News Source: 12punto