Turkish Lira in Biggest Daily Drop Since Coup Attempt -- Update
January 11 2017 - 02:40PM
Dow Jones News
By Mike Bird and Carolyn Cui
The Turkish lira fell as much as 3.5% against the U.S. dollar
Wednesday on escalating concerns over Turkey's economy and
security.
The decline marked the biggest daily drop since a failed coup in
July 2016, when factions of the Turkish military attempted to
overthrow the government of President Recep Tayyip Erdogan.
Wednesday's slide came as data showed Turkey's current-account
deficit widened in November. But investor concerns have been
building in recent weeks over Turkey's economy, Mr. Erdogan's
response to July's insurrection, and political uncertainty over a
bill to overhaul the constitution that would concentrate executive
powers in the president's office.
The lira has fallen for the past five days, with investors
ignoring an attempt by the Turkish central bank to shore up the
currency on Tuesday. It has fallen 10% against the greenback since
the beginning of the year and was trading down 2% at 3.88 to the
dollar in late European trading.
"Such price action implies that we are witnessing a full-scale
crisis of confidence in the lira caused by rapidly escalating
market concerns about domestic factors dominated by prevailing
security issues, uncertainty in politics after the failed coup and
the risk of a downgrade by rating agencies," Piotr Matys,
emerging-market currency strategist at Rabobank, wrote in a
note.
The lira's fall comes as many emerging-market currencies decline
against the dollar amid expectations of higher U.S. interest
rates.
But among emerging markets, some analysts believe that Turkey is
the most vulnerable to the stronger dollar and recent rises in
global bond yields, due to its heavy reliance on short-term dollar
funding.
Turkey's short-term external debt amounted to 74% of its total
foreign reserves in October. Around half of that debt was
denominated in dollars, according to Turkey's central bank.
Some of the factors that had contained the lira's downward move
in 2016 are no longer in force, said Jonas David, an
emerging-market analyst at UBS Wealth Management.
As bond yields continue to climb from their last year's record
lows, financing foreign debt becomes more expensive.
Turkish households had also been buying local assets such as
stocks and bonds, which had supported the lira in mid-2016, Mr.
David said. But they have been increasingly converting their
deposits into dollar, thanks to declining confidence in the economy
and intensified geopolitical risks, he said.
Derivative contracts that allow investors to buy and sell the
lira at a future date suggest that investors generally believe the
currency will stay weak throughout the year. Futures contracts
expiring in December now trade at 4.14 to the dollar, 0.34 lira
above the currency's current level.
Investors have also continued to sell Turkish bonds, adding to
pressure on the lira.
Turkish government bond returns fell 1% in 2016, while global
emerging-market sovereign debt returned 9.6%, according to Citi
analysts.
"People were already quite underweight in December, they're
certainly more underweight now, both real money and hedge funds,"
said Paul McNamara, a portfolio manager at GAM Holding AG.
He expects the central bank to raise the benchmark interest rate
from 8% to stem the currency's weakness. "I don't see what's going
to stop it falling otherwise."
On Tuesday, Turkey's central bank loosened foreign-currency
reserve requirements by a half percentage point. The move was aimed
at allowing banks to release foreign currency into the market and
prop up the lira, but the currency fell around 2.3% that day.
The central bank promised further steps to maintain prices and
financial stability, without providing further details.
Turkish authorities have also attempted more unconventional
measures to halt the selloff. In December, Mr. Erdogan called on
the public to exchange their foreign-currency savings to support
the currency.
Dollar strength is adding to the pressure on the lira, and other
emerging-market currencies. The ICE dollar index, which measures
the greenback against a basket of international currencies, is up
0.7% in 2017 so far amid expectations that U.S. interest rates will
rise at a faster clip than expected through much of last year.
--Riva Gold, Georgi Kantchev and Yeliz Candemir contributed to
this article.
Write to Mike Bird at Mike.Bird@wsj.com and Carolyn Cui at
carolyn.cui@wsj.com
(END) Dow Jones Newswires
January 11, 2017 14:25 ET (19:25 GMT)
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