$20.3 billion enters Turkey through “carry trade” in last four months

 Recent sharp movements in the Japanese Yen, recession discussions in the US, and losses in global markets at the beginning of the week have reignited carry trade debates. With its high-interest rates, Turkey remains an attractive destination for carry trade.

According to calculations by bankers, after the local elections, $20.3 billion entered Turkey through carry trade from April 1 to the end of the week of July 26. During the same period, the Central Bank managed to increase its net international reserves by $90.1 billion.

WHAT IS CARRY TRADE?

The carry trade involves investors borrowing cheaply in low-interest countries and depositing in countries with higher interest rates. The surprise interest rate hike by the Bank of Japan at the end of last month accelerated the unwinding of carry trade positions and the return to the Japanese Yen globally. The significant losses in global markets at the beginning of this week also led to a decrease in carry trade positions. Exchange rate fluctuations are closely related to carry trade positions, as sharp currency movements pose the biggest risk, potentially causing losses. However, Turkey has not experienced extreme movements in exchange rates as in previous years.

The total reserves were on the rise again last week. The stable exchange rates and high interest rates make Turkey advantageous for carry trade. The relative stability of the currency following local elections has accelerated such inflows. During the same period, the Central Bank continued to strengthen its reserves. Bankers calculated that the Turkish Lira (TL) carry trade position change reached $20.3 billion between April 1 and July 26. In the week ending July 26, the Central Bank’s total gross gold and foreign exchange reserves decreased by $6 billion to $148 billion, mainly due to the expiration of a $5 billion currency swap with Saudi Arabia. Bankers estimated that as of the week ending August 2, the Central Bank’s total reserves increased by $2.3 billion to $150.3 billion. The impact of the deposit account’s expiration gave way to a rise last week.

Currency increases can be limited

In the week ending July 26, net international reserves, excluding swaps, increased by $1.5 billion to $24.4 billion. As of the week ending July 26, the Central Bank increased its net international reserves by $90.1 billion after the local elections up to July 26. Upon closer inspection, it is evident that $20.3 billion of this amount was due to carry trade.