Turkey seeks to bolster lira by asking banks to buy futures contracts - report

The Turkish authorities have taken a further step to help boost the lira’s value, asking banks to hedge their currency risk with futures contracts, Bloomberg reported on Thursday.

The authorities advised the banks last week that they should buy the contracts to balance any foreign currency obligations they have to clients, Bloomberg said, citing people with knowledge of the matter.

The move comes at a time when the central bank’s reserves of foreign currency, net of obligations, have dwindled and when state-run banks are ramping up their short dollar positions to legal limits to help bolster the lira, which dropped to a record low of 7.269 per dollar in May. The lira’s value has remained almost constant in recent weeks at 6.85 per dollar, raising the eyebrows of some economists and commentators, who question whether the lira is now free floating.

Turkish banks typically buy dollars in the regular market when they sell a foreign currency forward contract to corporate clients in order to hedge risk. With the new measure, the central bank would be able to sell less of its reserves because demand has been shifted to the futures market.

The decision is also part of the central bank’s efforts to increase its reserves of foreign exchange, the people said, according to Bloomberg. The central bank and the banking regulator declined to comment, Bloomberg said.

The central bank also increased the amount of foreign currency banks must hold in its coffers in a decision at the weekend. That measure is expected to increase its reserves by about $9.2 billion, Bloomberg said.

The bank’s gross foreign currency reserves total less than $50 billion. Net of liabilities, such as currency swaps it has conducted with state-run banks to defend the lira, the reserves are close to negative or in negative territory.