UPDATE 2-Turkish lira firmer in volatile trade after central bank steps
By Daren Butler
ISTANBUL, March 26 (Reuters) - The Turkish lira firmed again on Tuesday in volatile trade, as a series of so-called back door tightening steps taken by the central bank had the intended effect of clawing back most of last week's steep losses.
A weekly measure of the lira's implied volatility spiked on Tuesday to its highest reading since September, when Turkey was in the throes of last year's currency crisis that, at its worst, sliced some 30 percent from the value of the lira.
Turkey's central bank kept two auctions shut Tuesday to underpin the lira against a growing tide of Turks losing confidence and turning to foreign cash over the last six months.
At 0806 GMT, the lira stood at 5.5189 against the U.S. dollar, strengthening from Monday's closing level of 5.5520. It had reached as much as 5.4650 in early trade after initially weakening to 5.5949.
The lira fell sharply on Friday and closed last week at 5.7625 to the dollar, its worst closing value since October. The selloff came just over a week before local elections across the country in which President Tayyip Erdogan is campaigning hard for his AK Party.
The government's response at the weekend, including threatening bankers and investigating their foreign exchange operations, rattled investors in a way that could spell trouble for 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 main BIST 100 share index dipped 1.06 percent Tuesday after two days of losses.
On Monday the central bank made several tweaks to lira liquidity, chiefly halting funding through one-week repos at 24.0 percent, its policy rate. It also began lending at 25.5 percent from the overnight repo and depo windows.
Yatirim Finansman Securities said a rise in banks' cross-currency swap limits with the central bank, to 20 percent from 10 percent, boosted liquidity by 5 billion lira.
In yet another tightening move analysts said was through the "back door" - because the policy rate was left unchanged at 24 percent, where it has been since September - the central bank also stopped regular $500-million overnight forex lending.
These measures pushed up the average cost of funding to 24.31 percent on Monday from a previous 24.0 percent. Bankers forecast it would rise to 24.60 percent on Tuesday.
But Yatirim Finansman said the real effects of the change in liquidity policy were more apparent in the offshore market for lira. The overnight forward implied (USDTRY) yield shot up to over 90 percent at the end of Monday's trading session, it said.
"This coupled with much lower global core yields and higher EMFX, squeezed offshore short lira positions, allowing lira to pare back some of Friday's losses," it said.
"Going forward, we would watch whether the astronomic rise in relatively thin size of offshore lira market would be enough to stabilize the currency," the note added.
(Reporting by Daren Butler Editing by Dominic Evans and Jonathan Spicer)email@example.com))