The Turkish lira fell 2 per cent to record lows on Wednesday, unnerved by authorities’ failure to announce decisive stabilising steps as the currency decoupled from broader emerging markets, which mostly traded more firmly.
The lira has already lost 8.5 per cent against the dollar this year – making it the world’s worst-performing big currency – shrugging off the central bank’s move on Tuesday to add dollar liquidity to financial markets and a smaller-than-expected current account deficit.
The moves are filtering through to bond markets, with local 10-year yields opening some 30 basis points (bps) higher and dollar bonds falling 0.7-1.0 cents lower across the curve.
Options markets indicate more pain for the currency, with one-month risk reversals, which measure the relative demand for options on a currency rising or falling against the dollar, showing a bias for further weakness.
"It's January, but the lira has gone through most people's year-end forecasts. I think it can keep weakening if the central bank doesn't do something, as flow pressures will work against it," UniCredit strategist Kiran Kowshik said.
Weaknesses
Ms Kowshik noted Turkey’s weaknesses: regular militant attacks that deter tourism and investment, negative real interest rates and an annual external funding requirement of around 30 per cent of GDP – far higher than most big emerging markets.
“At the end of the day they need to get real rates significantly higher . . . They need to do it in one shot and they need to do it quickly,” said Ms Kowshik, who believes a 300 bps hike may be needed.
But Turkey was an outlier among emerging markets. MSCI's main emerging equity index tracked world stocks higher, reaching two-month highs.
Many expects US president-elect Donald Trump’s press conference on Wednesday will offer detail on his infrastructure spending plans, a potential positive for global commodity prices.
– (Reuters)
