Carry Trade Fades as Turkish Lira Gets Trounced by Dollar

Just when lira carry traders thought they had 2014 in the bag, along came the dollar.

Borrowing dollars to buy lira debt earned 5.8 percent this year through last month, the fourth-biggest return in 23 emerging markets tracked by Bloomberg. By today, the gains had shrunk to 2 percent as a 4.2 percent slump in Turkey’s currency against the greenback this month ate into profits from holding the nation’s bonds.

Like most riskier emerging-market assets, the lira is suffering as the strengthening U.S. economy pushes the Federal Reserve toward raising interest rates in 2015, what would be the first increase in nine years. Turkey’s currency has underperformed peers in December as the biggest current-account deficit in the developing world leaves it vulnerable to capital outflows.

“This was the year of the dollar,” Murat Yardimci, the head of trading at ING Bank AS in Istanbul, said by e-mail Dec. 24. “We are long on Turkish bonds with a foreign-currency hedge for 2015. After June, we expect the debt to perform relatively well, but the dollar” will reach new records versus the lira, he said.

December’s decline in the lira compares with a 3.2 percent retreat in an index of emerging-market currencies, while the Bloomberg Dollar Spot Index climbed 1.8 percent. The lira weakened to a record 2.4146 per dollar on Dec. 16 and gained 0.1 percent to 2.3187 by 4:17 p.m. in Istanbul.

Turkish two-year note yields fell 222 basis points this year to 7.88 percent today.

‘Decisive’ Inflation

Consumer-price growth accelerated to 9.15 percent in November, resisting an almost 50 percent decline in the cost of crude since June.

Falling commodity prices, oil in particular, will support a decelerating inflation trend in the first half of 2015, the central bank said after its decision to keep the benchmark rate on hold at 8.25 percent on Dec. 24.

“Inflation will be very decisive” for carry-trade returns next year, Evren Kirikoglu, a strategist at Akbank TAS in Istanbul, said by e-mail on Dec. 24. Slowing inflation would help support the lira even as the central bank reduces interest rates, he said.

The euro may displace the dollar as the favored currency for funding the carry trade as the European Central Bank steps up bond buying and the greenback continues to strengthen, according to Erkin Isik, an Istanbul-based strategist at Turk Economi Bankasi AS.

Traders who financed their lira debt purchases by borrowing euros earned 15.2 percent this year, bested only by the Argentinian peso, the Indian rupee and the Indonesian rupiah among emerging markets tracked by Bloomberg.

Investors should be “grateful” if they can achieve this year’s carry returns next year, Burak Cetinceker, a money manager at Strateji Menkul Degerler in Istanbul, wrote in e-mailed comments on Dec. 24. “The lira will drop another 10 percent next year” against dollar, he said.

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