Bloomberg News

Lira Short a Risk as Turkey Bank Plays ‘Hardball,’ Citi Says

October 05, 2011

(Updates with auction results in fourth paragraph.)

Oct. 5 (Bloomberg) -- Investors who expect Turkey’s lira to depreciate will “suffer” as the central bank intervenes to defend the currency with large dollar auctions, Citigroup Global Markets Ltd. said.

“The Central Bank of Turkey will play hardball in foreign currency going forward, and their reserve position allows for that,” Luis Costa, a London-based emerging-markets strategist with Citigroup, wrote in a report e-mailed to clients today. “Shorts in the Turkish lira will suffer as the central bank is likely to increase the magnitude of currency interventions.”

Investors who sell short hope to profit by borrowing assets, selling them and then repurchasing them at a lower price before returning them to the holder.

The central bank sold $750 million for liras today after offering as much as $1.35 billion in a daily auction, its biggest since starting daily sales on Aug. 5. The bank got $1.83 billion in bids, compared with $375 million yesterday when it sold $140 million.

The lira rebounded from a record low against the dollar reached yesterday after the auction announcement, strengthening 1 percent to 1.8688 by 2:30 p.m. in Istanbul.

“I don’t think the central bank will give Turkish lira shorts an easy life,” Costa wrote in a separate e-mail. “Foreign-currency interventions seldom change the direction of the markets, but slows the pace of deterioration. At this point it makes sense for the central bank to show more sizable volumes as they try to defend these 1.8000 to 1.9000 big levels.”

Turkey’s foreign-currency reserves stood at $85.6 billion last week, down from a 2011 high of $93.3 billion on July 8, according to central bank data on Bloomberg.

The central bank said in a statement today that “large amounts” of dollar sales could continue to limit volatility in the value of the lira.

--Editors: Ana Monteiro, Linda Shen

To contact the reporter on this story: Benjamin Harvey in Istanbul at bharvey11@bloomberg.net

To contact the editor responsible for this story: Gavin Serkin at gserkin@bloomberg.net


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