(Bloomberg) -- Citigroup Inc. and JPMorgan Chase & Co. are among banks recommending buying the Turkish lira as the spread between offshore and onshore yields widens, signaling foreign investors are betting on the currency via derivatives. 

The lira rose as much 0.8% against the dollar while gains at Grand Bazaar, where locals can buy and sell physical cash, exceeded 1%. The offshore overnight implied yield on the lira was trading at 45.5%, well below onshore rates of 52.5% as of Friday. 

Dropping forward yields offshore implies that investors abroad are buying the lira against the dollar or unwinding short-lira positions, which had surged ahead of local elections in March.

“We are now selling USDTRY 6m forwards, as we believe the currency may further absorb better flows over the next couple of months,” Citi strategists including Luis Costa said in a note to clients on Monday, referring to forward agreements with a six-month maturity. They said the trade is predicated on an assumption that the central bank will stay cautious, with tight policies against rising inflation. 

JPMorgan last week also moved its lira recommendation to overweight from marketweight, recommending a trade against the dollar via 12-month forwards. 

“We believe the risk-reward on long lira has improved again” following a surprise interest-rate hike in March, the JPMorgan strategists wrote in a note. “The structural improvement in the current account, together with the additional monetary policy tightening delivered and promised fiscal tightening, allow prospect for current-account surpluses; local dollarization pressure in March can reverse, reacting to improving real yield profile.” 

Foreign investor bullishness on the lira marks a reversal in fortunes for a currency that’s weakened against the dollar for each of the past 11 years, and is another 9% lower so far in 2024. Still, any appreciation could remain limited with the central bank also aiming to rebuild its foreign-currency reserves. Swap restrictions for foreign investors, which were introduced to protect the currency against short-selling from abroad, have also been limiting the potential gains.

“After the central bank’s rate meeting last week, local markets are calm, waiting for this week’s inflation data for April,” said Tufan Comert, BBVA’s strategy director for the Middle East and North Africa. “It should be noted that the lira trades well as some short positions opened before the local elections are reversed and the tourism season starts, which means that the FX liquidity will increase” in the period ahead. 

Earlier this month, central bank Governor Fatih Karahan promised to do “whatever it takes” to curb inflation and signaled further monetary tightening if needed. The comments build on his recent attempts to reassure the market that the central bank is serious about tackling inflation, which is on track to exceed 70% by May. 

Policymakers appointed as part of an overhaul following last year’s presidential election have been trying to rein in inflation and restore damaged investor confidence. Since June, the benchmark interest rate has been raised by more than 40 percentage points to 50%. 

(Updates with prices at Grand Bazaar in second paragraph.)

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