Turkish lira recovers from flash crash

Lasting only a few minutes on Monday, the Turkish lira fell against the U.S. dollar from TL 5.81 to the dollar to nearly TL 6.40 to the dollar. This “flash crash” lasted only a couple of minutes and it quickly recovered. The lira now trades up against the dollar at 5.79 late Wednesday.

Following the G7 summit in France, news of a prolonged trade war with China caused panic among investors. The U.S. dollar index began rising meaning all non-dollar currencies began to lose value against the dollar. As investors began to worry about losing money should the Turkish lira depreciates, as all their emerging market peers had done, they began to sell their liras. A moderate drop in the value of the lira, 1 to 2% caused a greater panic among investors. Before you know it, the lira was down nearly 3% when the margin calls began to come in.

Brokers will allow investors to borrow funds many times more than the money they have in their accounts so that investors can potentially make more money and so their commissions are more substantial. To make sure traders are good for the money they’ve borrowed, brokers will impose limits, such as “a 50% loss in the total value of the position will trigger a margin call.”

A margin call is when the broker sells your assets without your permission to prevent you from being unable to repay them.

As brokers unwound the lira positions by selling lira and buying yen, the Turkish lira lost a lot of its value in seconds. With few buyers awake at the time, the losses became more pronounced and caused the flash crash we’re talking about. Those who realized what was going on made a killing by buying up all the liras being sold at the time. They each would have profited 10% in less than 10 minutes. Those that sold into the weakness realized losses they didn’t have to.

Now the dust has cleared and the lira has appreciated against the U.S. dollar and other currencies relative to the beginning of the flash crash. While the Turkish central bank acted to stabilize the lira early Monday morning, they could have acted quicker.

According to Daily Sabah