Turk poll prospects, central bank stance bolster lira
ISTANBUL – Turkey’s lira has rallied to year-highs despite a backdrop of political risk, but instead of the currency’s prospects dimming they could strengthen as the central bank appears unusually reluctant to intervene. The currency is being buoyed by fat yields, bets on a market-friendly July election result, and a belief the central bank will tolerate lira strength for a number of reasons, including the effect it can have in dampening inflation. The lira is trading at its firmest since March 2006, quoted at 1.2990 per dollar yesterday, and if it goes through 1.2955 will be back to levels not seen since March 2005. Turkey has some of the highest real interest rates in emerging markets, which lure investors, particularly when risk appetite and liquidity are high and developed world interest rates are low. «It’s been the global backdrop which is driving things… 1.30 has been quite a big level. Probably levels of 1.28 are achievable,» said Debbie Orgill, economist at ABN Amro. «In the next few days we might see this.» Adding to appetite for Turkish assets are opinion polls showing the ruling, business-friendly Justice and Development Party (AKP) will win a majority in general elections on July 22, reducing the likelihood of a return to the ineffective and short-lived coalition governments of the past. Polls also show the AKP’s majority would not be big enough to allow it to avoid seeking agreement with other parties over parliament’s choice of president, and analysts say a consensus candidate could ease tension between the religious-minded AK Party and the secular elite. The AKP’s attempt to get its candidate elected president earlier this year ended in political crisis, criticism from the powerful army, and elections being called early. »In the last few days we have seen being priced in (the scenario of) three parties entering parliament, a single-party government and a president being elected with consensus,» said TEB chief economist Emin Ozturk. The central bank has intervened to sell lira around these levels before but economists say it is unlikely this time around, although it could increase dollar buying at its daily auctions from a current maximum of $45 million. The bank targets inflation – which at an annual 9.2 percent in May was double a year-end target of 4 percent – and a strong lira will help curb inflation. Meanwhile exports, which tend to suffer from a strong currency, are robust, growing 28 percent year-on-year in April. TEB’s Ozturk also said that since a mini-crisis in May and June last year – during which the lira lost 25 percent of its value and inflation shot back into double digits – the central bank has switched its focus to money supply. «After this I think the central bank left the currency to float completely freely, controlling rates and money base growth,» he said. «That’s why the chances of direct intervention are rather low.» Also arguing against intervention is the strengthening impact of foreign exchange inflows from tourism and Turkish workers abroad returning for the summer. «Because direct intervention wouldn’t have much effect during the period of these inflows, I don’t think the central bank will want to lose reserves,» said Finans Invest economist Banu Kivci Tokali. Some economists said a stronger lira boosted the chances of an earlier rate cut. Yield is all Economists say the main reason behind the lira strength is high interest rates, which brings in investors who borrow in cheap currencies to invest in high-yielding ones, known as the carry trade. Benchmark borrowing rates here are 17.50 percent. «We are in a carry-loving world and the Turkish lira is the highest carry currency in liquid global foreign exchange… and that driver is so strong that it’s enough to circumvent any domestic volatility that surrounds the elections,» said Caio Natividade, strategist at Deutsche Bank in London. That means a correction would likely be prompted by a global event, such as rising US bond yields, which make riskier assets less attractive. Natividade said any negative domestic event would have to be more dramatic than an anti-government statement from the army at the end of April, which, although raising the specter of previous coups in Turkey, prompted only a short market sell-off. But some analysts said that as positive news was priced in, there was room for an upset. «For me, there is only scope for disappointment in terms of the outcome,» said Lucy Bethell, emerging markets strategist at The Royal Bank of Scotland. »The lira is so volatile that the carry gets wiped out really quickly if things go wrong.»
