Iran Deal Boosting Lira as Oil Effect Vies With Political Risk

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Iran’s nuclear deal may have just given the Turkish lira another leg up.

Already the best-performing emerging-market currency in the past month as slumping oil prices reduced pressure on Turkey’s import bill, the lira climbed to a seven-week high on Tuesday as Iran and six world powers sealed a historic accord to end sanctions. The nation’s two-year notes also gained on speculation the country will benefit from business opportunities in its southeastern neighbor.

“An Iran deal would likely create some structural underpin for the Turkish story as Turkish companies exploit the renewed export opportunity,” Michael Harris, the head of Turkey research at Renaissance Capital, said by e-mail on Tuesday. “Turkey will be a clear beneficiary of any oil-price pressure driven by extra supply coming to the market.”

The end to the Islamic Republic’s international isolation could help refocus investor attention on the benefits of lower oil prices on Turkey’s current account rather than turmoil in domestic politics. While the lira has rebounded, it’s still lagging behind every currency outside of Latin America this year due to risks leading up to an election in June that cost the ruling party its 13-year majority. So far, the AK Party has failed to form a coalition government, raising the chances of an early election.

‘Great News’

Yields on the nation’s two-year notes slid 47 basis points in the past month, the most after Brazil, as Brent crude dropped below $60 a barrel for the first time since April. Turkey, which imports more than 90 percent of its oil, suffers from the second-largest current-account shortfall relative to the size of its economy among the Group of 20 countries.

Oil prices at current levels will allow Turkey to save as much as $13 billion from lower energy-import costs, Energy Minister Taner Yildiz said in televised remarks Tuesday. Finance Minister Mehmet Simsek said on Twitter that the deal was “likely to boost trade and investments between the two countries,” and is “great news” for the Turkish economy.

The oil effect was among factors that prompted Citigroup Inc. to revise its rating on the lira to neutral from underweight, London-based strategist Luis Costa said in an e-mailed report the same day. The drop in crude -- which lost as much as 2.5 percent to $56.43 in London Tuesday before rebounding -- “is adding another layer of support for Turkish lira dynamics,” he said.

Capping Gains

Citigroup isn’t changing its forecast for the currency to weaken to 2.74 per dollar this quarter, a 3.5 percent retreat from current levels. The lira weakened 0.6 percent to 2.6465 per dollar at 5:16 p.m. in Istanbul, and is down 12 percent this year.

Gains in the nation’s assets may be capped for now as some investors brace for early elections.

The lira pared gains and stocks reversed their fourth daily advance on Tuesday after Prime Minister Ahmet Davutoglu said an opposition party won’t participate in the government, raising the prospect of fresh elections later this year. Davutoglu has has until mid-August to form a coalition.

Oil prices will decline further if the international community decides to lift sanctions at a faster pace than expected, enabling Iran to sell all of its crude oil from stockpiles accumulated in the past 12 years, according to Bloomberg analyst Philippe Chladek.

“Lower oil prices are a fillip to the Turkish economy,” Emad Mostaque, a strategist at Ecstrat in London, said by e-mail. “The economic potential is undeniable.”

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