Let's talk FX funding..

Today's move in $TRY is a great opportunity to talk about a rather niche segment of FX trading which is the funding cost..

Generally speaking, when we trade any FX spot (buy CCYx/ sell CCYz) the trade settles in T+2 days (except TRY and CAD who are T+1)
So if we want to keep the trade alive we need to roll the trade forward. When we roll the trade we basically borrow in CCYz and lend in CCYx. If we borrow at a lower rate and lend in a higher rate we will earn the carry (and vice versa...)
In EM, in addition to the rate differential between the key rates the market prices in additional basis in most currencies to reflect the funding risk premium of these market.

Low risk EM (CZK, ILS, PLN, CNH) will price a moderate, while premium, while market like ZAR , TRY
generally have some "chunky" risk premium as these markets tend to blow up every now and then...

Today's move in TRY is a prefect example of what happens when sht hits the fan... massive demand for USD (short TRY) counters a very active CB, that tries to prevent the lira from
tanking by selling USD reserves (or what's left of it...)... when that doesn't work the forward pts start to squeeze as the market is drained from TRY and everybody is trying to buy USDTRY...

By squeezing the fwd pts being short TRY becomes quite expensive trade
1wk implied TRY rate is roughly 160% (while the CB rate is 20%)... to breakeven we need spot to move ~3% higher (which is not too much given the move, but definitely raises the bar)
These funding squeezes tend to last for about 1wk-2wks (depends on the reason) until the market starts to fade them...

Good Luck

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