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Turkish lira slips while bond curve normalizes

A photo illustration taken in Istanbul shows a U.S. 100 dollar banknote against Turkish lira banknotes of various denominations January 7, 2014. (REUTERS/Murad Sezer)

ISTANBUL: Turkey’s lira slipped against the dollar Wednesday as the government bond yield curve, which had briefly inverted on speculation about an emergency rate hike to rescue the currency, returned to a positive slope.

The lira has hit several record lows since Dec. 17, when a wide-ranging graft probe began with a series of dawn raids and arrests that have led to the resignation of three ministers and the reported dismissal of hundreds of police officers.

In its latest salvo against the damaging corruption inquiry, the ruling AK Party sent plans to parliament late Tuesday seeking say over the judge and prosecutorappointments.

“This is the latest sign that things are not about to calm down ahead of March local elections,” Commerzbank said in a research note.

Ratings agency Fitch warned Tuesday that “strains on institutional integrity” caused by tensions between the government and judiciary were among factors that could weaken Turkey’s creditworthiness.

However, Moody’s, which raised Turkey’s sovereign credit rating to investment grade last May, said in comments Wednesday that domestic political risk was already embedded in its rating for the country.

The lira slipped moderately to 2.1755 by 1306 GMT from 2.1605 late Tuesday, though it was firmer than Monday’s record low of 2.1950.

The yield on Turkey’s 10-year benchmark bond fell to 10.09 percent from 10.12 percent late Tuesday, while that on the two-year bond fell to 10 percent.

Turkey’s yield curve is still much flatter than normal levels of around 50-100 basis points, but has steepened from an intra-day level of minus 7 bps hit Tuesday.

An inverted yield curve is often a sign of credit stress, although the bond curve in Turkey has sometimes inverted before monetary tightening announcements.

Public comments by Finance Minister Mehmet Simsek Tuesday may have reduced speculation about a monetary tightening as soon as the Jan. 21 policy committee meeting.

Simsek indicated that he expected the low-rate monetary policy to continue, saying Turkey was taking measures to keep domestic demand at reasonable levels without resorting to interest rate hikes – implying that he still had an understanding with the central bank on low rates.

News of lower-than-expected growth in industrial production reversed early gains by Turkish equities Wednesday. Industrial output rose a calendar and seasonally adjusted 2.9 percent month-on-month in November, missing a Reuters forecast of 4.2 percent but exceeding October’s 0.7 percent increase.

The main Istanbul stock index was down 1.39 percent at 67,645.84 points, underperforming the main emerging market index, which rose 0.38 percent.

“We can ... say that the November figure did not indicate a genuine sequential growth of industrial output,” Deniz Cicek, economist at Turkey-based Finansbank, wrote.

“As further social and political unrest seems possible ahead of the two major elections this year, we see a noteworthy threat on economic stability that poses downward risk on the growth outlook in 2014.”

 
A version of this article appeared in the print edition of The Daily Star on January 09, 2014, on page 5.

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Summary

Turkey's lira slipped against the dollar Wednesday as the government bond yield curve, which had briefly inverted on speculation about an emergency rate hike to rescue the currency, returned to a positive slope.

The lira slipped moderately to 2.1755 by 1306 GMT from 2.1605 late Tuesday, though it was firmer than Monday's record low of 2.1950 .

The yield on Turkey's 10-year benchmark bond fell to 10.09 percent from 10.12 percent late Tuesday, while that on the two-year bond fell to 10 percent.

Turkey's yield curve is still much flatter than normal levels of around 50-100 basis points, but has steepened from an intra-day level of minus 7 bps hit Tuesday.


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