The top forecaster for the Turkish lira says his prediction for the currency to strengthen by year-end risks being undermined by the country’s external funding needs even as the central bank provides support.
The lira will rise 3 percent to 1.89 per dollar by the end of the third quarter, with the currency at 1.90 by Dec. 31, Koon Chow, an emerging-market strategist in London at Barclays Plc, the most accurate forecaster for the past two quarters, said yesterday in an interview by phone. Should the exchange rate stabilize, bond yields, among the highest in developing nations, may fall, he said.
Policy makers will keep liquidity tight and possibly adjust interest rates, moves that will “provide some support for the lira,” Chow said. “But there’s rising risk to our forecasts. This is because Turkey has one of the largest external funding needs among the major emerging-market economies.”
Turkey sold a record $2.25 billion of foreign exchange yesterday, bringing the amount over four weeks to $4.9 billion to prop up the currency as better-than-estimated U.S. jobs data last week fueled speculation the Federal Reserve will scale back stimulus. Turkey’s current-account deficit swelled to the most in two years in April after economic growth accelerated more than economists forecast in the first quarter.
The lira weakened as much as 0.3 percent yesterday to a record 1.9740 per dollar before the central bank stepped in. The currency then rebounded, appreciating 1.1 percent yesterday. It lost 0.1 percent to 1.9479 at 5:10 p.m. in Istanbul today.
Turkey’s currency will probably weaken to 2.06 per dollar by the end of 2013, according to X-Trade Broker Dom Maklerski SA, the third best lira forecaster in the 12 months through June. That compares with median forecasts of 1.88 for the third quarter and 1.89 for the fourth in a Bloomberg survey.
“All of emerging-market currencies including the Turkish lira will depreciate this year,” Przemyslaw Kwiecien, chief economist at X-Trade Brokers in Warsaw, said by phone yesterday, citing Fed policy. “You cannot fight the global tendencies. Of course you can try, but from my experience it’s not working.”
The yield on two-year lira notes jumped 47 basis points to 8.26 percent yesterday, erasing its declines in the past 12 months. The yield climbed 347 basis points, or 3.47 percentage points, from a record-low close on May 17 as the Fed signaled it may trim bond purchases and anti-government protests broke out on May 31. It rose 34 basis points to 8.60 percent today.
“Liquidity tightening and foreign-exchange auctions indicate that the Turkish central bank would rather sacrifice rates volatility in order to maintain currency stability,” Siddharth Kapoor, a London-based strategist at Deutsche Bank AG said by e-mail yesterday.
Turkey’s current-account deficit widened to $8.17 billion in April from $4.55 billion a year earlier, the statistics office said June 11, the same day the central bank held its first foreign-exchange auction since January 2012. The economy expanded 3 percent in the first three months, up from 1.4 percent the previous quarter and more than the 2.3 percent predicted in a Bloomberg survey of economists, a separate report showed that day.
Ukraine and Turkey are among the most vulnerable to an external-funding shortfall in emerging markets, according to a report published by Standard & Poor’s last week.
Turkey’s current-account gap reached a record $77 billion two years ago, or about 10 percent of gross domestic product. The deficit will probably reach 6.8 percent of GDP this year, from 6.03 percent in 2012, according to the median of 23 estimates in a Bloomberg survey of economists.
The extra yield investors demand to hold Turkey’s dollar bonds rather than Treasuries advanced 13 basis point to 260 today, JPMorgan Chase & Co.’s EMBI Global Diversified index showed.
“The most important thing for the bond market is the exchange rate stabilizing,” said Chow at Barclays. “If the lira exchange rate stabilizes, yields can come down.”