Turkish Lira Erases 2014 Loss as Erdogan Victory Spurs Optimism

The lira surged the most among emerging markets and Turkish stocks rallied as investors wagered victory for Prime Minister Recep Tayyip Erdogan’s party in local elections may arrest foreign capital outflows.

Turkey’s currency jumped 2.4 percent to 2.1409 per dollar at 6:19 p.m. in Istanbul, 0.3 percent stronger this year. It has appreciated 12 percent since touching a record-low 2.39 on Jan. 27, yet remains 5.4 percent weaker since a corruption investigation targeting Erdogan’s government erupted on Dec. 17. The Borsa Istanbul index of shares climbed 0.9 percent to the highest level since Dec. 18.

The victory consolidates the Justice and Development Party’s hold on power after a more than 13-year tenure that is the longest period of political stability since the multiparty system was adopted in 1946. Erdogan has responded to the graft probe with a purge of the police force and judiciary aimed at followers of U.S.-based cleric Fethullah Gulen and today promised to pursue “traitors” within the state.

“This is a bullish outcome for the local market simply because investors are not keen on heightened political uncertainty and instability,” Benoit Anne, head of emerging-markets strategy at Societe Generale SA in London, said by e-mail. “There is repricing of political risks to the downside, which is substantially supportive of Turkish lira assets.”

The ruling Justice and Development Party, or AKP, won 46 percent of the vote nationwide yesterday, according to unofficial results reported by NTV television with 98 percent of ballots counted. That was up from 39 percent at the last election in 2009.

‘Trouble Ahead’

Erdogan campaigned on his government’s successes in improving the economy, health care and transport, saying that record was more important to Turks than corruption charges he said were concocted by political enemies.

Foreign investors sold a net $3 billion of bonds and stocks this year through March 14, according to central bank data.

Turkey’s five-year credit-default swaps fell 12 basis points to 220, the lowest since Dec. 19 on a closing basis, according to data compiled by Bloomberg. Yields on two-year government notes slid 10 basis points to 10.69 percent, after reaching an almost five-year high of 11.60 percent on March 24.

Erdogan’s vow to take action against Gulen shows “more trouble could be ahead of us,” Henrik Gullberg, a London-based currency strategist at Deutsche Bank AG, said by e-mail. “Even if he won more votes than generally expected, there is still more than 50 percent who are very much against him.”

A deluge of recordings, some purportedly from police wiretaps, have flooded the Internet in recent weeks, calling into question everything from the financial probity of Erdogan’s ministers and family and their religious piety to the integrity of Turkey’s foreign policy and the independence of its media.

There isn’t “much more appreciation potential” for the lira beyond 2.15 versus the dollar, Thu Lan Nguyen, a currency strategist at Commerzbank AG, wrote in e-mailed comments today. “First comments by Erdogan are going into the direction of taking an even tougher stance against the opposition.”

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