Central bank opens first dollar-to-lira currency swap auction since August

Duvar English

Turkey’s central bank on Dec. 19 launched a dollar-to-lira swap auction with a volume of $1 billion and a 3-month maturity to help boost its foreign reserves. It was the first time that the bank opened such an auction since August.

The central bank had announced in August that it would hold lira swap transactions with 1-, 3-, and 6-month maturities – in addition to the existing 1-week swap transactions.

"With the aim of enhancing flexibility in Turkish lira and FX liquidity management, Turkish lira currency swap transactions will also be executed with one, three and six-month maturities via the traditional auction method," it had said.

Banking watchdog limits swaps trading

Meanwhile, the Banking Regulation and Supervision Agency, or BDDK as it is known, announced late on Dec. 18 that it was limiting banks’ foreign exchange swaps, forwards, options and other derivative transactions with non-residents to a maximum 10% of banks’ legal equity – from 25%.

In a statement, the BDDK said the limit was set for lira sell side derivative transactions with maturities of seven days or less. It said transactions made with consolidated credit institutions and partnerships of financial institutions will be excluded when calculating this limit.

“This step will make it harder to sell the lira and take a short position,” Tera Yatırım economist Enver Erkan was quoted as saying by Reuters. He said that the intervention in swap markets could hurt investor sentiment, adding: “The goal is to reduce exchange rate volatility.”

Turkish lira slides after interventions

Following the interventions of the banking watchdog and the central bank, lira slid to its weakest level in daily trade since May on Dec. 19.

The currency, still vulnerable after last year’s crisis in which it shed nearly 30% against the dollar, was on track for its fifth straight day of losses and was the worst performer among emerging market peers.

The lira on Dec. 19 weakened as far as 5.9425 against the dollar, which itself was sliding after President Donald Trump was impeached by the U.S. House of Representatives. 

Central bank: Improvement in inflation outlook continues

Meanwhile, the central bank said on Dec. 19 that an increased consensus in expectations for a downtrend in the medium-term inflation outlook indicates that uncertainties have significantly decreased.

In the minutes of last week’s monetary policy committee meeting, the central bank also said that as the contribution of net exports to economic growth declines, economic recovery is expected to be sustained with the help of the disinflation process.