Lira Rallies 2nd Day as Central Bank Stands Against Volatility

The lira advanced for a second day after central bank Governor Erdem Basci said he’d intervene to tame currency volatility and as calm returned to Istanbul after a night of violence. Bond yields fell.

The Turkish currency gained 0.7 percent to 1.8767 per dollar at 6:26 p.m. in Istanbul, trimming its loss this month to less than 0.1 percent. Yields on two-year benchmark bonds fell two basis points to 6.80 percent, declining from the highest level since Nov. 7 yesterday.

Turkey’s central bank is obligated to intervene in extreme currency volatility, Basci said at a conference in Giresun province today. The real effective exchange rate, or REER, an inflation-adjusted gauge of the currency against Turkey’s trading partners, is “well below” the bank’s 120 threshold in June, Basci said. A reading above 120 indicates the lira is overvalued, according to the bank. The attractiveness of Turkish lira and bonds may rise next week, Basci said.

“Basci displayed a determined stance,” Ercan Erguzel, an economist at Denizbank AS in Istanbul, wrote in e-mailed comments today. “It’s important that he declares that the central bank will intervene at times of excess volatility.”

Crisis Talks

The lira’s volatility for the past three months rose to the highest since Oct. 11 today. The central bank sold $250 million in five currency auctions yesterday, after the lira reached its weakest level since December 2011 a day earlier. The central bank also tightened funding by halting its one-week repo auctions yesterday for the first time since June 4, 2012. The bank resumed the sales today, offering 4 billion liras to lenders and getting 20.7 billion liras in bids.

“Foreign investors are taking a wait-and-see attitude,” Marc Chandler, chief currency strategist at Brown Brothers Harriman & Co. in New York, said in e-mailed comments. “The lira is benefiting not only from the intervention but also from the general stabilization of the capital markets.”

The currency’s support is seen near 1.86 per dollar and will be capped at 1.90, Chandler said.

The Borsa Istanbul main index of stocks climbed 2.5 percent to 76,880.65 today.

Police drove protesters out of Taksim Square using tear gas and water cannons. The demonstrations, which spread nationwide after May 31 when the police attacked a group of protesters occupying a park to prevent redevelopment, are the biggest in more than 10 years under Prime Minister Recep Tayyip Erdogan. The unrest sent Turkish stocks plunging 11 percent this month.

Kemal Kilicdaroglu, leader of Turkey’s main opposition Republican People’s Party, today urged President Abdullah Gul to convene a meeting of party leaders to discuss the crisis. Gul said he saw no benefit to such a meeting.

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