Goldman Sachs warns: The depreciation of the Turkish lira poses a threat to the world's best arbitrage trades.

Goldman Sachs stated that the most successful arbitrage trades in the world now seem to be facing risks because the Central Bank of Turkey allows the lira to depreciate. Goldman economists Clemens Grafe and Basak Edizgil wrote in a report on Wednesday that the Turkish Central Bank is allowing the lira to depreciate against the dollar at a faster rate than usual, possibly aiming to limit hot money inflows and respond to complaints from exporters about the overvaluation of the currency. Goldman stated, "It is possible that the Central Bank has decided not to focus on increasing reserves to address capital inflows. Therefore, allowing the lira to depreciate may be to some extent to prevent these inflows." The report from the Wall Street bank indicates that investors are still trying to predict how the Turkish Central Bank will adjust its policies to deal with the impact of the domestic political crisis in Turkey since March. Turkey arrested Istanbul Mayor Ekrem Imamoglu, a popular presidential candidate, which damaged the value of the Turkish lira and exacerbated inflation, prompting the currency management department to end the rate-cut cycle that began last December. Nevertheless, the current depreciation rate of the lira is contradicting the policymakers' expected target. The goal is to reduce the monthly inflation rate from about 38% last month to 24% by the end of this year and to 12% by 2026. Goldman stated, "We believe that the Turkish Central Bank will abandon its current forex policy when it reopens the rate-cut cycle at the latest in the July meeting. We think the current forex policy is the Central Bank implementing depreciation measures in advance to avoid significant real appreciation." In May, the lira depreciated by about 1.6% against the dollar, while it fell by 1.4% last month. Over the past two years, high interest rates and the strong performance of the lira after adjusting for consumer inflation have led to a significant inflow of funds in arbitrage trading form. This is an investment strategy where traders borrow low-yielding currencies to invest in other areas. However, this has made liquidity management by the Turkish Central Bank more complex, as it uses these funds to increase reserves while injecting billions of lira into the financial system. The Turkish Central Bank has faced an oversupply situation of over 1 trillion lira, posing a threat to its strict monetary policy. Furthermore, this excessive dependence on external markets eventually became a disadvantage. After Imamoglu's arrest, international investors started selling lira assets, further exacerbating the market collapse.