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Currency investors are paying the highest premium in four months to hedge against further losses in Turkey’s lira as they brace for national elections.
The spread on six-month options to sell the lira for the US dollar over those to buy the Turkish currency, known as the 25 delta risk reversals, has widened to 13 percentage points this week. That’s the biggest hedging premium among major emerging-market currencies, a dubious title held previously by the Russian ruble.
President Recep Tayyip Erdogan has hinted that the presidential and parliamentary elections may be moved forward to May 14 from the original date of June 18. The vote is seen as a crucial moment for foreign investors, who have been forced to stay on the sidelines amid the country’s unconventional macroeconomic and monetary policies.
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“It shows that the implied outlook has worsened,” said Cristian Maggio, the head of portfolio and ESG Strategy at TD Securities in London. “With elections looming, there’s a risk the central bank may cut again before the vote and all this is starting to weigh more visibly on market expectations. So options start to price more accurately the risk of weakening lira from current levels,” he said.
The lira, one of the few currencies still offering negative real yields, has traded within a narrow range since September thanks to a carefully-managed strategy that includes interventions. The Monetary Policy Committee last week added ambiguity to the direction of its policy by removing the phrase about current rates being “adequate.” Policymakers have left the benchmark rate unchanged for two consecutive months, following a 500 basis-point cut.
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