(Bloomberg) -- Hedging against swings in the Turkish currency has almost never been so expensive, eclipsing the benefit of plunging oil prices for the beleaguered lira.
Turkey is a net energy importer, and with Brent falling below $20 a barrel amid a global supply glut, the economy should benefit from slower inflation and a narrower current-account deficit. Yet the options market points to more pain for the lira as it flirts with a record low.
The cost of buying protection for the next three months is now more than 11 percentage points above the lira’s historical volatility, near the widest premium in data spanning over two decades. According to Bloomberg data, this popular gauge for valuing an option has been cheaper 99% of the time over the past three years, by far the biggest dislocation among 31 major currencies.
The scale of divergence underlines the challenges that Turkey faces. While the currency has outperformed its peers this year, that’s largely because state banks have been flooding the market with dollars to support it. Meanwhile, the central bank’s net reserves have been depleted, unnerving investors. Policy makers are now seeking currency swap lines with other central banks.
Data last week showed the central bank’s net reserves -- which strip out liabilities including local lenders’ reserve requirements -- fell to $26.3 billion in the week through April 10. Of that, $25.9 billion was borrowed through short-term swaps, the bulk of which had a maturity of one month or less, according to the latest data through the end of February.
The lira slipped as much as 0.8% to 6.9948per dollar on Tuesday, edging ever closer to the psychologically-important 7-per-dollar mark, and to its weakest level since it hit a record low in the August 2018 currency crisis.
State banks sold around $400 million on Tuesday, according to two traders with knowledge of the matter. Turkey’s state lenders don’t comment on interventions in the foreign-exchange market.
In January, central-bank governor Murat Uysal said government-owned lenders have been carrying out transactions in line with regulatory limits and may continue to be active in the currency market.
©2020 Bloomberg L.P.