Lira Extends Drop as Russian Jet Downing Raises Turkey Risk

  • Lira heads for third day of declines, most in a month
  • Two-year government bond yields set for highest since October

Turkey’s lira dropped a third day, headed for its longest losing streak in a month, after the downing of a Russian jet escalated tension between the two nations. Bonds also extended declines while stocks gained.

The lira slipped 0.3 percent against the dollar 2.8847 at 5:58 p.m. in Istanbul, poised for the lowest close in two weeks. The government’s two-year bonds fell as the yield climbed to 10.47 percent, the highest in more than a month. The Borsa Istanbul 100 Index swung between gains and losses before closing 0.8 percent higher.

The lira, already trading weaker than its 200-day moving average, passed the 100-day average
The lira, already trading weaker than its 200-day moving average, passed the 100-day average

“Although it seems a serious military escalation is unlikely at this stage, and the UN’s and U.S.’s call for calm to both sides is somewhat comforting, the market is as yet unwilling to drop caution," said Gulsen Ayaz, the director of institutional sales at Istanbul-based Deniz Yatirim Menkul Kiymetler AS. “It is inevitable that the economic ties and trade between the two countries will weaken going forward."

Russia ratcheted-up criticism of Turkey and moved to reinforce its operations in Syria as U.S. President Barack Obama and the NATO military alliance called for an easing of tensions after the incident on the Syrian border on Tuesday. While Putin has ruled out any military retaliation against Turkey, a member of the North Atlantic Treaty Organization, the clash highlighted the danger that Syria’s war could spiral into a broader conflict after Russia began air attacks there Sept. 30.

Turkey’s airspace is also NATO’s airspace, Prime Minister Ahmet Davutoglu said in parliament in Ankara on Wednesday. Still, Turkey has strong economic, political and cultural ties with Russia and these “cannot be sacrificed to communication mishaps,” he said.

The cost of insuring Turkey’s debt for five years climbed the most since September on Tuesday before declining one basis point to 258 today, according to S&P Capital IQ’s CMA.

Government Program

Meanwhile, cutting inflation to single digits will be the “main principle” of the Turkish government, according to a program announced by Davutoglu on Wednesday.

The Borsa Istanbul 100 Index erased earlier declines of as much as 1 percent before closing at 76,836.52 after the new government program was announced. Turkiye Petrol Rafinerileri AS’s 4.6 percent gain was the biggest contributor to the increase.

Monetary policy will support growth and jobs without contradicting the main aim of price stability, Davutoglu said. The Turkish government will also start pilot work on automatic inclusion in a private pensions system, according to the program.

“Obviously we’re going to have to see more details on the program and execution," Kerem Baykal, a fund manager at AK Portfoy in Istanbul, said by phone. “But everything in the program seems to be going in the right direction and I think that supports sentiment.”

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