Turkish markets extended declines, sending the currency below 3 per dollar for the first time, as domestic political turmoil and a rout in emerging markets deepened.
The lira has weakened 22 percent this year, making it the year’s second-worst emerging-market currency following inconclusive elections in June and militant violence that reached the capital Istanbul Wednesday. Facing an economic slowdown, the central bank left interest rates unchanged this week and President Recep Tayyip Erdogan may call a new vote as soon as October.
“Nobody wants to catch the falling knife,” Akin Tuzun, an analyst at VTB in Moscow, said by e-mail.
Currencies in developing nations have tumbled this month as investors anticipated an interest-rate increase in the U.S. and China devalued the yuan. The tenge plunged to a record after Kazakhstan relinquished control of its exchange rate, becoming the latest country to abandon efforts to prop up its currency before the U.S. Federal Reserve acts. Vietnam devalued its currency on Wednesday for the third time this year and South Africa’s rand reached the lowest since 2001.
“The lira is one of a number of emerging-market currencies which are under strain largely because of domestic vulnerabilities and weaknesses,” Nicholas Spiro, the managing director of London-based Spiro Sovereign Strategy, said by e-mail. “Even if there’s a modest improvement in the external backdrop, the lira is unlikely to benefit. This is a mostly home-grown currency crisis that has yet to run its course.”
The currency depreciated as much as 2.7 percent to trade at 3.0031 per dollar in Istanbul. It was at 2.9754 as of 12:43 p.m. local time. The Borsa Istanbul 100 Index of stocks dropped 1.7 percent to the lowest since Oct. 16. The yield on two-year government bonds jumped 40 basis points to 11.11 percent, the highest since March 2014 on a closing basis.
Credit-default swaps insuring Turkish sovereign debt against default for five years rose to 283 points, the highest on a closing basis since June 6, 2012, CMA prices show. The yield on 10-year government notes increased 21 basis points to 10.47 percent.
While Turkish policy makers kept borrowing costs on hold for a sixth month this week, they’ve pushed the weighted-average cost of central bank funding up more than 100 basis points to 8.67 percent as of yesterday. The bank decided to implement a tighter liquidity policy “as long as deemed necessary,” it said in a statement accompanying its rates decision.
“It’s hard to find a catalyst that can reverse the lira’s decline,” said Akin Tas, vice president of derivatives trading at Istanbul-based Akbank TAS. “The market fears the central bank will remain behind the curve.”
Turkey is more reliant on capital inflows than many countries because of the size of its current-account deficit, making it among the most vulnerable economies to higher U.S. borrowing costs. Fed officials have indicated concern about stubbornly low inflation, even as they signaled that an improving job market is bringing them closer to the first interest-rate increase in almost a decade.
Turkey’s economy will probably grow 3 percent in 2015, less than the 5.4 percent average in the past five years, according to data compiled by Bloomberg. While inflation slowed to 6.8 percent in July, consumer-price increases remain above the central bank’s 5 percent target.
Akbank TAS, Turkey’s second-largest bank by market capitalization, and oil refiner Tupras led stock declines with a 1.6 percent and 2.4 percent drop respectively.
Societe Generale SA analysts Phoenix Kalen and Roxana Hulea said the lira may depreciate to as low as 3.2088 per dollar, according to an an e-mailed note on Wednesday.
There’s little information on what caused the lira’s slump on Thursday morning, according to Emre Tekin, a senior fixed income trader at Turkiye Garanti Bankasi AS. “I heard a market player bought not more than $20 million and bid at a higher level and triggered algorithms,” he said.
A flare up in violence yesterday added to pressure on the lira, as assailants tossed a grenade at a guard post at Istanbul’s Dolmabahce Palace and then opened fire, setting off a gun battle in the center of Turkey’s largest city. No one was killed and two members of a leftist extremist group were detained.
Eight soldiers were killed when the Kurdistan Workers’ Party, or PKK, detonated a land mine under an armored vehicle yesterday in the southeastern town of Siirt, state-run TRT TV reported.
A government offensive against terrorist groups and the collapse of a three-year truce with Kurdish militants followed parliamentary elections in June that failed to deliver a ruling majority to any one party. Talks to form a coalition government failed and Turkey may be headed for fresh elections within about three months.
Nationalist opposition leader Devlet Bahceli called on Wednesday for the use of martial law in war-torn areas.
(An earlier version of this story corrected the year-to-date decline in the second paragraph.)For more, read this QuickTake: Turkey’s Continental Divide