As Turkey's government is working to reverse years of unorthodox economic policy, the country’s embattled currency is now seeing FX carry-trade investors returning, according to global investment bank Goldman Sachs.
A carry-trade is the return an investor gets for holding, or carrying, a low-interest-rate currency and then converting the borrowed amount into another currency with a higher rate of return.
“The recent increase in policy rates suggests that deposit rates are likely to increase further, and while implementation risks clearly remain, the recent articulation and support of a positive real rate strategy — in sharp contrast to previous years — suggest that it may be possible to beat the FX depreciation reflected in forward pricing again, implying that the Lira carry trade is back,” Goldman analysts wrote in a report dated Sept. 27.
Last week, Turkish interest rates rose to 30% from 25%. Goldman economists forecast that a nominal rate of around 40% will bring Turkey’s real rates into positive territory. The real interest rate is the nominal interest rate (30%) minus the rate of inflation, which can be expected or annual.
