- Lira’s one-month implied volatility now the world’s highest
- Wall Street banks see lira sliding regardless of vote outcome
According to Bloomberg article published on April 17, 2023, Lira traders are bracing for tumult ahead of next month’s elections in Türkiye, sending the cost to hedge against currency swings to the highest in the world.
The Turkish lira’s one-month implied volatility against the dollar has doubled in two days as the tenor now captures the May 14 vote. At 32.7% on Monday, it now surpasses all other currencies. Offshore lira funding costs also surged, a sign of distress ahead of the election.
Regardless of the outcome of the elections, Wall Street banks have recently voiced expectations for the likelihood of a significant weakening in the lira, citing concerns around the sustainability of the government’s efforts to keep tight control over the currency in the past few years.
The lira has already fallen 25% in the past year to record lows, and slipped for a sixth day Monday to 19.3777 against the dollar as of 11:58 a.m. in Istanbul. The cost of offshore funding has spiked, with the overnight forward implied yield on the lira-US dollar pair climbing to 191% on Monday, the highest level since March 21, according to data compiled by Bloomberg.
JPMorgan Chase & Co. analysts said in a note last week that they expect the lira to slide to as low as 25 versus the dollar “amid elevated volatility,” even assuming a commitment to reverse President Recep Tayyip Erdogan’s unorthodox policies after the elections.
Erdogan is facing the toughest contest of his political career against the broadest-ever grouping of opposition parties. His main rival, Kemal Kilicdaroglu, who has promised a return to economic orthodoxy, leads in most polls, as the nation grapples with economic turmoil and a difficult recovery from a pair of devastating earthquakes in February.
