* Measure of implied volatility at highest since lastSeptember
* Central bank tweaks help reverse last week's steep losses
* Expected rate cut might be delayed - traders (Updates prices)By Nevzat Devranoglu and Orhan CoskunANKARA, March 26 (Reuters) - The Turkish lira firmed againon Tuesday in volatile trade, as a series of "back door" actionsby the central bank succeeded in erasing most of last week'ssteep losses, even as expectations dimmed for interest rate cutsin the months ahead.
A measure of the lira's implied volatility spiked on Tuesdayto its highest weekly reading since September, when Turkey wasin the throes of a currency crisis that, at its worst, slicedsome 30 percent from the value of the lira.Turkey's central bank kept two auctions shut on Tuesday tounderpin the lira against a growing tide over the last sixmonths of Turks losing confidence and turning to foreign cash.
At 1802 GMT, the lira stood at 5.3950 againstthe U.S. dollar, strengthening around 3 percent from Monday'sclosing level of 5.5520. It had touched as much as 5.38 in lateevening trade after initially easing to 5.5949 in the morning.Beginning late on Monday, Turkish banks started to keep liraswap market transactions in London well below a 25-percent limitset by the banking watchdog, four sources with knowledge of thematter told Reuters. It was not clear how much of the limit wasbeing used. Traders said this caused the lira overnight swap rate inLondon to soar to 330 percent, and the weekly swap rate to 125percent, according to Refinitiv Eikon data. Last week, theserates stood at 22 percent and 24 percent respectively.The lira fell sharply on Friday and closed last week at5.7625 to the dollar, its worst closing value since October. Theselloff came just over a week before local elections in whichPresident Tayyip Erdogan is campaigning hard for his AK Party.
The government's response at the weekend, includingthreatening bankers and investigating their foreign exchangeoperations, rattled investors in a way that could spell troublefor an economy in recession and reliant on foreign funding.The yield on Turkey's benchmark 10-year bond rose to 18.06 percent, from 17.35 percent on Monday. The mainBIST 100 share index dipped 1.06 percent Tuesday aftertwo days of losses.
RETHINKING RATE CUTS?On Monday the central bank made several tweaks to liraliquidity, chiefly halting funding through one-week repos at24.0 percent, its policy rate. It also began lending at 25.5percent from the overnight repo and depo windows.
Analysts said the tightening moves - called "back door"actions because the policy rate was left unchanged at 24percent, where it has been since September - could dimexpectations that the central bank will cut rates by mid year,as a Reuters poll in February predicted."These two seem completely opposite to each other," said aforeign exchange desk trader in a bank. The latest moves meanthe central bank "is now making an additional tightening by 150basis points," the trader said.Since the lira's initial plunge on Friday, money markettraders appear to have boosted odds of rate hikes later thisyear, after the cost of borrowing wholesale sawits biggest jump on record on Friday and headed higher onMonday. See: Some investors and officials warn that such wholesalemarkets can be misleading due to their limited size, especiallyafter such volatility and rapid-fire policy changes. Thegovernment has promised "single-digit" rates as soon aspossible.
Yatirim Finansman Securities said a rise in banks'cross-currency swap limits with the central bank boostedliquidity by 5 billion lira on Monday. In yet another tweak, thecentral bank also stopped regular $500-million overnight forexlending.
These measures pushed up the average cost of funding to24.31 percent on Monday from a previous 24.0 percent. Bankersforecast it would rise to 24.60 percent on Tuesday.But Yatirim Finansman said the real effects of the change inliquidity policy were more apparent in the offshore market forlira. The overnight forward implied (USDTRY) yield shot up toover 90 percent at the end of Monday's trading session, it said."This coupled with much lower global core yields and higherEMFX, squeezed offshore short lira positions, allowing lira topare back some of Friday's losses," it said."Going forward, we would watch whether the astronomic risein relatively thin size of offshore lira market would be enoughto stabilize the currency," the note added.<^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^Markets see more Turkish rate hikes png ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^> (Additional reporting by Daren ButlerEditing by Jonathan Spicer and Gareth Jones)
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