The lira, the second-worst performing currency after South Africa’s rand this year, will lead global gains in the first half of 2012 as Turkey pares its record current-account deficit, according to the median of estimates from more than 20 banks on Bloomberg.
The lira is set to rally 4.4 percent by the end of June for the biggest gain against the dollar among 33 global currencies ranked by Bloomberg, the survey shows. The lira will be the first to benefit from a revival of risk appetite as the European debt crisis is expected to be resolved by March, Benoit Anne, chief emerging-market strategist at Societe Generale SA in London, said in e-mailed comments.
“Turkey is less exposed to recession risks and will again be a prime investment destination,” said Anne who expects the lira to surge 17.5 percent next year to 1.60.
The lira has fallen 18 percent this year, closing past the 1.9 per dollar level on Dec. 19 for the first time. Turkey has the highest current-account deficit among 60 major economies monitored by the International Monetary Fund at 10.2 percent of the gross domestic product. Inflation accelerated to 9.5 percent in November, the highest in 19 months, as the central bank cut its benchmark interest rate to a record low of 5.75%.
Turkey’s 12-month deficit peaked in October and the cumulative deficit will shrink toward 7.5 percent of GDP next year as lira’s depreciation makes imports more expensive and exports cheaper, according to Tevfik Aksoy, Morgan Stanley’s London-based chief economist for the Central and Eastern Europe, Middle East and Africa region.
Less Bearish Market
Option traders are turning less bearish on the lira, reducing the premium to sell the currency to 3.2 percentage points more than the contracts to buy it, down from a year-high of 6.3 percentage points on Sept. 26, according to data compiled by Bloomberg.
The lira weakened 0.2 percent to 1.8881 per dollar at 5:23 p.m. in Istanbul.
Better risk appetite and lower volatility are the two necessary ingredients for carry trade to become an important driver for the lira but that won’t happen until the second quarter, Mats Olausson, emerging-markets strategist at Skandinaviska Enskilda Banken AB in Stockholm, said by phone. Carry traders bet on interest rate differentials, buying currencies of countries with higher borrowing costs and selling those of nations with lower interest rates. The Turkish central bank runs a flexible monetary policy via an interest rate corridor, forcing banks to borrow at rates as high as 12.5 percent.
“During the first half of 2012, valuation and broader set of fundamentals will become more important as investment determinants,” Olaussan said. “This will benefit the lira given Turkey’s relatively better outlook.”
Nineteen out of 21 banks expect the lira to strengthen to 1.80 or below in the fourth quarter of 2012, according to estimates with Bloomberg. Eleven banks expect the lira to weaken to 1.88 or above during the first quarter. Any depreciation to 2 per dollar would be an “obviously oversold level,” Olausson said.
The lira approached a key undervalued level on Dec. 19 when the currency closed at its lowest on record, according to the relative strength index. The gauge showed lira pegged at 68. A reading above 70 indicates the currency may appreciate from the oversold position, according to technical analysts.
The central bank sold $700 million yesterday and today, stepping up its dollar sales in daily auctions, sending the currency to its biggest rally this month. The Ankara-based bank offered to sell as much as $1.7 billion in the next two days.
“The central bank has been giving the impression that it is currently content with the level of the currency and might even prefer a slightly stronger level, which suggests that the downside might be more limited than before,” Aksoy said.