Turkish Lira Posts Biggest Monthly Gain Since 2012 Before Vote

Turkey's High Stakes Election
  • Stocks, 10-year bonds rally the most in a year in October
  • Signs politicians may form coalition govt boost Turkish assets

The Turkish lira posted its biggest month gain in almost four years on optimism a government will be formed even if Sunday’s parliamentary election is inconclusive, amid renewed appetite for riskier assets.

The currency rose on the last trading day before the vote, extending its advance in October to 3.8 percent. While polls show the nation’s second election in six months will probably result in another hung parliament, signs that politicians are willing to form a coalition has boosted sentiment. Gains in the nation’s benchmark stock index and 10-year bonds this month were the highest in a year.

The Justice and Development Party, or AKP, lost its parliamentary majority in June but political parties failed to form a coalition government subsequently, prompting a repeat vote and spurring a selloff. Meanwhile, bets the U.S. Federal Reserve may raise interest rates before the end of 2015 faded after the bank’s meeting last month, rekindling demand for riskier assets.

“The lira has benefited from an emerging market-wide rally, but also the fact that the market seems to have come around to the idea of a coalition government as a positive for Turkey, which was not the case before,” Philippe Dauba-Pantanacce, an emerging market economist at Standard Chartered Plc in London, said by e-mail. “From a market’s perspective, the upcoming elections might carry less stakes than previously thought.”

The lira gained 0.7 percent to 2.9150 against the dollar on Friday. The Borsa Istanbul 100, which resumed trading on Friday after a national holiday that began after the first session on Wednesday, rose 1.1 percent.

Turkey’s 10-year government bond yields fell 10 basis points to 9.77 percent, bringing the drop this month to 126 basis points.

Messy Negotiations

While the assets rose this month, the lira, stocks and bonds all fell this week. Even though a coalition government is the most likely outcome of the vote, the process remains fraught with risks, Morgan Stanley said in a note on Friday. The Fed dropped a reference to global risks in its statement on Wednesday, boosting odds of an interest-rate increase this year to 50 percent from around 36 percent a week ago. Turkey’s central bank has indicated its interest rate policies will be influenced by the Fed’s.

“It is likely to be a messy and very noisy negotiation process,” Morgan Stanley’s Istanbul-based economist Ercan Erguzel wrote in an e-mailed report. “We think that if the lira depreciates sharply again and exceeds 3.1 against the dollar, the central bank may change its Fed anchor and start tightening.”

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