Lira Swings as Traders Weigh New Rates Regime and Rising Dollar

Turkey’s lira fluctuated between gains and losses as investors weighed optimism over the central bank’s plan to simplify interest-rate regime and the global risk aversion spurred by Italy’s political impasse.

The currency declined as much as 0.5 percent, reversing an advance of as much as 0.6 percent against the dollar. While the currency’s one-month implied volatility fell for a fourth day, it’s still the highest in the world.

The lira is on course for its worst month since 2008 as concern over the nation’s current-account deficit and double-digit inflation put the nation’s assets at the center of an emerging-market selloff.

The currency climbed the most in more than two years on Monday after the monetary authority said that, starting on June 1, its benchmark will be the one-week repurchase rate, which it hadn’t used as its main funding tool since January 2017, while overnight borrowing and overnight lending rates will be placed equidistant at 150 basis points below and above the benchmark.

Read More: Why Turkey Simplified Its Tangled Interest Rates

The return to a simple interest-rate corridor is “important at a time when the market is questioning the independence of the central bank and the willingness of political authorities to implement a standard monetary policy,” Goldman Sachs economists including Clemens Grafe said in a report dated May 28. “The interest-rate corridor does allow the central bank some flexibility in using liquidity management to affect rates when needed.”

But optimism over a less complicated rates regime was short-lived as the dollar extended its gain to a third day, dragging every emerging-market currency down. The Bloomberg Dollar Spot Index is heading for the highest close since December, as chaos in Italy and other parts of the euro region highlighted the possible return of political risk.

Read More: Europe’s Fragility Is Exposed Again as Italy and Spain Flare Up

The lira declined 0.1 percent to 4.5897 per dollar as of 10:18 a.m. in Istanbul. The currency’s implied volatility dropped to 25 percent. Borsa Istanbul 100 Index declined 0.9 percent and the yield on 10-year bonds rose three basis points to 14.17 percent.

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