Limiting lira’s volatility
ANKARA (Reuters) – The Turkish central bank bought an estimated $2 billion in repeated intervention in the foreign exchange market on Friday, saying it was aiming to curb exchange rate volatility after a further strengthening of the lira. Investors had predicted the bank would step in to prevent the dollar from losing further ground against the lira, with exporters saying the currency’s level had weakened their competitiveness abroad, especially in East Asian markets. Economists also blame the strong lira for widening Turkey’s current account deficit by lowering the cost of imports. The lira eased to 1.3445 to the dollar in the interbank market in Monday-dated trade after the intervention. It was at 1.3205 before the bank stepped in after closing at 1.3250 on Thursday. «In recent days, excess volatility has again been observed in the foreign exchange market, and this volatility in the value of the Turkish lira has become even more marked when the change in the value of the US dollar in international markets is considered,» the central bank said in a statement. The dollar’s appreciation against other major currencies in recent weeks has not much affected the lira, as optimism over Turkey’s economic recovery has prompted strong capital inflows. «We see the intervention as good news as central bank foreign exchange reserves will further be increased to new record levels – reducing longer term external balance vulnerability,» said HVB Group analyst Simon Quijano-Evans. The bank’s reserves were at $39.959 billion in the week ending on July 15, the latest available data. Trade deficit Local manufacturers have long said a strong lira was harming their competitiveness in international markets and widening the trade deficit by making their products more expensive versus rival manufacturers in China and India. In May, the trade deficit reached a record $4.75 billion, surging 44.3 percent from a year earlier, and economists predict that it will remain around record-high levels in June. «Obviously, the short-term is lira-negative but we see the lira being supported mid-term through continued inflows. We see an end-year rate of 1.35 (against the dollar),» Quijano-Evans said, adding that a strong lira would help contain inflation amid rising oil price pressures. The central bank’s latest survey of expectations predicts the year-end rate will be 1.4251 to the dollar. The central bank last stepped in on June 3, when it is believed to have bought more than $2 billion to rein in the lira, then trading at 1.3375 to the dollar. In another development, Turkey’s benchmark sovereign debt climbed on Friday as approval for the sale of a majority stake in Turk Telekom was seen as likely to reduce foreign debt issuance needs. In what was seen as a watershed moment in Turkey’s privatization process, the Competition Board gave its unconditional approval for the sale of a 55 percent stake, worth $6.55 billion, in the state landline operator. «Turkey’s external debt is performing well because the FDI inflows is a cheap way to fund the current account deficit. That is the main concern for investors, but if they get FDI they don’t have to issue external debt to fund it,» said Giancarlo Perasso, head of emerging market research at WestLB in London. Turkey’s bonds also rose in concert with Brazil’s benchmark debt. Investors are waiting for final maturity details of a swap of up to $5.6 billion in outstanding Brazilian C-bonds for a new sovereign bond. The new bond will have an 8 percent coupon. Turkey’s bond due 2030 was up 1.25 points in price, to bid 141.750, yielding 7.970 percent. The benchmark JP Morgan Emerging Markets Bond Index Plus (EMBI+) was just two basis points wider at 290 basis points over US Treasuries. Turkey’s spread on the EMBI+ was wider by three basis points to 268 basis points over US Treasuries. «Turkey is trading up for a number or reasons. There is a little bit of short-covering before the weekend, we are following stronger Treasuries and a stronger Brazil,» said one trader at a Dutch bank in London. Also on Friday, Turkish President Ahmet Necdet Sezer vetoed a key International Monetary Fund-backed law aimed at reforming the banking sector, sending it back to Parliament for another vote. The IMF has delayed finishing a first review of Turkey’s $10 billion stand-by accord and the release of a loan installment because of the government’s slow progress on reforms, including banking and social security laws. Neither the veto, nor the Turkish central bank’s intervention to weaken the lira impacted the sovereign debt.
