Overnight interest rates in the London swap market, which was used by foreign banks to obtain Turkish lira after the sharp depreciation in the currency, rose rapidly as a result of the Turkish banks' tendency to provide TL under the legal limits.
The overnight interest rates rose over 330 percent in the market Tuesday from 22 percent.
In a statement to Reuters, four relevant sources said Turkish banks, which are the main funder for TL in the London swap market, are shaping their transactions in a way that "will remain well below the legal limit of 25 percent in the coming days."
The sources further noted that the rise in the TL swap interest rates were affected by the decision of the Banking Regulation and Supervision Agency (BDDK) to limit the liquidity provided by the Turkish banks for the TL swap market to 25 percent of the equity in the summer of 2018 when the exchange rates tested their historical highs, as well as the tendency of the banks to regulate their transactions well below this limit on Monday and yesterday. The weekly swap rate rose to 125 percent from previous level of 24 percent.
Traders who piled into short-term swaps to capitalize on the Turkish lira's attractive 24 percent yield over the past months were caught off guard by the currency's depreciation at the end of last week and rushed to sell off. As a result, lira liquidity evaporated, sending rates soaring.
Foreign banks that obtained TL liquidity in the London swap market occasionally used this liquidity in the spot market to take a new position in which TL would lose value. The BDDK's decision and the tendency of Turkish banks that started yesterday decreased liquidity in the market, increasing the cost of TL.
The increase in the TL cost for foreigners and the steps taken by the Central Bank of the Republic of Turkey (CBRT) on Friday were the important factors limiting the depreciation of the TL. The dollar/TL parity, which climbed to 5.84 on Friday, today fell to 5.47 and is looking to balance at around 5.52.