Hedge funds’ favorite short currency is the Turkish lira, according to Societe Generale. Turkey is one of the fastest growing countries in the world based on the latest growth statistics. Turkey achieved this high growth rate by the help of a massive current account deficit fueling a housing boom. During the past three months Turkey’s Central Bank massively tightened the monetary policy and interest rates for commercial and consumer credit went up by 3-4 percentage points in the last 3-4 months. Now we are expecting the Turkish economy to actually contract during the third quarter. Hedge funds seem to agree with us and have been aggressively shorting the Turkish lira during the past few weeks.
The Turkish lira declined nearly 6% against the US dollar in July. The decline is more than 10% against the USD so far in 2011. The Turkish government and its newly appointed Central Bank President seem to agree on imitating China’s policies. Last month the Turkish Central Bank increased bank reserve requirements dramatically instead of increasing interest rates. Now they seem to be happy about the decline in the value of Turkish lira. Hedge funds saw the writing on the wall after Central Bank’s decision at the end of June and made Turkish lira their favorite currency short.
Despite the decline in Turkish lira and slowing economic growth, Turkey had a budget surplus during the first 6 months of the year. Nobody expects Turkey to join Greece, Portugal, Ireland, Spain, and Italy. Turkey followed strict IMF policies after its economic crisis in 2001 and has one of best public finances in Europe.