ISTANBUL: Turkey’s lira fell to record lows Friday and 10-year bond yields rose to three month highs, rattled by domestic political tensions and the U.S. Federal Reserve’s decision to start trimming its giant program of monetary stimulus.
To contain market volatility, Turkey’s central bank said it may sell as much as 10 times the amount previously announced at its forex auctions.
With the lira one of the developing world currencies most exposed to the shift in global capital prompted by the Fed, the bank has been selling a minimum of between $50 million and $100 million regularly, while also stemming domestic banking liquidity, to try to stabilize the lira in lieu of raising official interest rates.
A total of 50 people including three Cabinet ministers’ sons, prominent businessmen and local government officials, have been detained this week in a corruption crackdown that Prime Minister Recep Tayyip Erdogan termed a “dirty operation” to tarnish the state.
Dozens of senior police officers have since been removed from duty accused of abuse of office for keeping the investigation quiet from higher level officials in security institutions.
“These developments further point toward a genesis in AKP-Gulen conflict rather than any specific corruption issue which can be resolved easily,” a note from Commerzbank said.
“Such turmoil could intensify in other areas too, leading up to the March elections.” Turkey plans to hold local elections in March.
The lira traded at an all-time low of 2.0934 by 0831 GMT against the dollar compared to 2.0780 late Thursday. It stood at 2.0860 by 0910 GMT.
The yield on the 10-year benchmark bond was at 10.12 percent, compared to 10.19 percent Thursday, the highest since Sept. 6.
Having sustained heavy losses Tuesday and Thursday, the main stock index was down 0.42 percent to 68,810.77 points, underperforming a 0.34 percent fall in the wider emerging markets index.
Late Wednesday, after months of speculation, the U.S. central bank said it would start to trim its $85 billion of monthly bond buying from January, cutting the foreign inflows of cheap cash that has fuelled huge gains in emerging assets since 2009.
The move had been long-feared by Turkish investors because of its large current account deficit, running at around 7 percent of GDP and financed by cheap foreign funding.
But the Fed’s signal that it would keep interest rates near zero longer than previously promised offered some support, and by Friday the corruption probe was definitely dominating the agenda.
Turkish debt insurance costs also surged Friday to three-and-a-half-month highs. According to data from pricing provider Markit, five-year credit default swaps rose 12 basis points from the previous session to 220 bps, the highest since the end of September.