Lira, Turkish Bonds Surge as Central Bank Says Won’t Stop Currency Gaining

The lira climbed to its strongest level in almost three months after central bank governor Erdem Basci said he foresaw no need to intervene and arrest the currency’s advance this year. Bonds gained for a fourth day.

The lira appreciated 0.8 percent to 1.7729 per dollar as of 5:03 p.m. in Istanbul, the highest since Nov. 8 on a closing basis. It has risen 6.6 percent since Dec. 31, lagging six emerging market currencies including the zloty, forint and real.

The lira will be allowed to strengthen until it begins to threaten financial stability, Basci said at a news conference in Istanbul today. The central bank won’t intervene in the short- term and would like to see inflation slow at a faster pace than estimated, he said.

“There is time before the bank starts buying dollars,” Eren Yardimci, emerging market currency trader at UBS AG in Zurich, said in e-mailed comments. “Basci says he wants inflation to decline as the lira strengthens.”

The lira fell 18 percent against the dollar last year, the biggest decline among global currencies, after the country’s current-account deficit widened to a record as imports surged. Yields on benchmark two-year debt jumped 390 basis points last year in the biggest rise since 2006 as a widening trade gap spurred capital outflows. Inflation accelerated to 10.5 percent in December, more than double the central bank’s target and the highest level since 2008.

‘Further to Go’

The lira may fall toward 1.74 per dollar in the short-term, Citigroup Inc. said in an e-mailed report today.

“After the Russian ruble, the lira has been the long choice among fast money accounts and we believe it still has further to go, toward the 1.74 to 1.75 levels, particularly if the bearish dollar scenario persists,” said Luis Costa, a currency strategist at Citigroup in London.

The Turkish currency also rose after the trade deficit narrowed in December for a second straight month, beating analysts’ expectations. The gap fell to $8.1 billion from $8.7 billion a year earlier, the statistics office in Ankara said. The deficit was expected at $8.6 billion, according to the median estimate of eight economists surveyed by Bloomberg.

“The better-than-expected trade balance is the push factor” behind the lira’s appreciation, Sukru Haskan, a currency trader at Barclays Bank Plc in London, said in e-mailed comments. “The biggest fear of the foreigners that shunned Turkey is the macroeconomic fundamentals and most of all the trade deficit.”

Yields on two-year bonds fell three basis points to 9.44 percent, according to a Turk Ekonomi Bankasi AS index.

Investors should buy the lira versus the Czech koruna and shekel “at this point,” Societe Generale SA said. “In the right environment, meaning risk-on, a dovish central bank is not going to hurt the currency,” Benoit Anne, chief emerging market strategist at SocGen, said in an e-mail from London today. “I like accomodative bias when appropriate. That means rally in equities and local bonds, which ultimately will be good for the lira.”

The lira may strengthen to 1.65 per dollar by the end of the year, Anne said.

To contact the reporter on this story: Selcuk Gokoluk in Istanbul at sgokoluk@bloomberg.net

To contact the editor responsible for this story: Gavin Serkin at gserkin@bloomberg.net

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