COMMENT-This may be the turning point for Turkey’s currency

After a series of hikes that have lifted Turkey’s main interest rate from 8.5% to 50%, the lira has finally staged a meaningful rally. This could be the turning point for Turkey’s currency which might draw a lot of demand in an environment that is increasingly favouring carry trades.

Investors are currently willing to take greater risk, boosting stocks and some other speculative assets to record highs, which should cast the lira – that is both free-floating and extremely high yielding – in a very favourable light.

The more than 4% that investors can earn in just one month is a big draw, and is likely to be greater then losses incurred by those holding lira. In 2024 USD/TRY has risen 7.7% which would leave those holding lira since the start of this year with a profit.

The spark for greater demand is lira’s reaction to the latest rate hike which has seen USD/TRY drop almost 2%. This is the first time since rates began to rise that lira has reacted in such a positive manner, sending a “come and get me” signal to yield-hungry investors.

If Turkey’s lira can sustain this recovery, potential profits when FX returns are added to those from interest rates are huge. With risk appetite so high in financial markets, that call to buy will be answered.

Bets on lira rising versus currencies of nations embarking on easing cycles like the Swiss franc could do better.

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