The lira slid and Turkey’s bond risk jumped the most in two weeks after Fitch Ratings said a lengthy period of social unrest could put the nation’s investment-grade status at risk.
The lira weakened 0.5 percent to 1.9522 per dollar at 4:18 p.m. in Istanbul, after gaining as much as 0.3 percent, in the biggest depreciation among emerging markets. The cost to protect against default on Turkish debt jumped nine basis points, or 0.09 percentage point, to 212. Yields on benchmark two-year notes surged 40 basis points to 9 percent.
Fitch, which raised Turkey to investment grade in November, said “prolonged social unrest, poorly handled, could deter tourism, exacerbate short-term capital outflows, drive-up inflation and damage economic growth, potentially putting Turkey’s sovereign rating at risk.” Yields rose as investors weighed the prospects for U.S. scaling back stimulus before the Federal Reserve releases minutes of its June meeting today.
The Fitch statement “is making an impact” on the market, Burcin Metin, head of currency trading at ING Bank AS, wrote in e-mailed comments. “Emerging market positions are getting closed” before the release of Fed minutes, he said.
Turkey’s central bank refrained from lending at its one-week repurchase agreements auction for a third day, tightening the supply of liras. It has sold $6.2 billion in currency auctions since June 11, including $1.3 billion today to support the lira. The exchange rate hit a record low of 1.9740 on July 8, when the bank sold $2.25 billion, the most in a day since it started such sales in 2001.
“The sales surpassing $5 billion has started to fuel concern,” Ipek Ozkardeskaya, a currency strategist at Swissquote Bank SA in Geneva, wrote in e-mailed comments today. “The central bank still does not want to change its interest rate corridor and this is increasing pressure on the lira.”
The yield on two-year notes has climbed 219 basis points since the Fed’s last meeting on June 19, after which Chairman Ben S. Bernanke said policy makers may taper their $85 billion in monthly bond purchases this year should risks to the U.S. economy abate. Minutes of the last meeting will be released at 7 p.m. London time. Bernanke is scheduled to speak on economic policy at a conference in Boston today.
“Investors do not want to take risks before seeing the Fed minutes this evening,” Tufan Comert, a strategist at Garanti Securities in Istanbul, wrote in e-mailed comments.