Traders are ramping up protection against turmoil in the lira a week before Turkey’s elections, sending a measure of anticipated swings in the currency to the highest in the world.
(Bloomberg) — Traders are ramping up protection against turmoil in the lira a week before Turkey’s elections, sending a measure of anticipated swings in the currency to the highest in the world.
The lira’s implied volatility against the dollar over the next week surged to 64% from 8.4% on Friday to surpass all other currencies.
Market participants are bracing for a significant weakening in the lira, regardless of the outcome at the ballot box, amid concerns surrounding the sustainability of the government’s efforts to keep tight control over the currency in the past few years. Derivatives traders see a more-than-even probability that the lira will slide by 25% to 26 per dollar by the end of the third quarter, according to Bloomberg calculations based on prices of put and call options.
“We might see a significant slide in the Turkish lira,” Commerzbank AG strategist Ulrich Leuchtman wrote in a note Monday. “The artificial support of the official exchange rates will become increasingly shaky and will likely be impossible to maintain for much longer” and “the political motivation for maintaining the pretense of lira stability to the electorate will no longer exist,” he said.
The lira has already fallen 23% in the past year to record lows, and was little changed at 19.5022 against the greenback as of 10:48 a.m. in Istanbul.
A tightly contested election campaign threatens an end to President Recep Tayyip Erdogan’s two-decade rule and his unconventional economic path. His main rival, Kemal Kilicdaroglu, has promised a return to economic orthodoxy.
Emerging Markets Enter High-Anxiety Phase With Turkey Vote
Despite the jitters surrounding Turkey, a further slide in the lira is unlikely to have knock-on effects on the rest of emerging markets, given that it’s a reflection of the nation’s own mismanagement, according to Commerzbank.
“The mistakes of Turkish monetary policy are so clearly homemade and are so clearly not being repeated in other countries that I find it difficult to imagine how a failure of this very specific monetary policy will be contagious for other currencies whose central banks act very differently,” Leuchtman said.
–With assistance from Paul Abelsky.
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