Lira Oversold as Turkish Graft Probe Spurs Drop: Market Reversal
The Turkish lira is poised to rebound after a corruption scandal engulfing Prime Minister Recep Tayyip Erdogan’s government pushed the currency to its most oversold level in a decade.
The lira’s 14-day relative-strength index climbed to a 10-year high of 74 this week, measured on a quarterly basis, signaling a turnaround may be imminent, data compiled by Bloomberg show. The RSI stood at 63 at the end of June last year when mass unrest was ignited by police tear-gassing a park in Istanbul occupied by people who opposed plans to tear it down for a government redevelopment project. The lira slid yesterday to 2.1886 per dollar, its weakest level since at least 1981.
The Central Bank of Turkey reacted to last year’s 17 percent plunge in the lira by pledging Dec. 24 to buy at least $6 billion of the local currency through the end of this month to prop it up and keep the nation’s current-account deficit under control. The sons of three ministers and the head of state-run lender Turkiye Halk Bankasi AS (HALKB) were arrested last month amid a probe into bribery, gold smuggling and corruption in government tenders.
“It would be brave to take a short position on a currency when it’s already this cheap,” Mehmet Gerz, the chief investment officer at Ata Asset Management, said in an interview in Istanbul yesterday. “Having fallen so much in 2013, the lira is certainly no longer overvalued.” A short position is a bet an asset will fall in value.
The lira dropped 6 percent in December, its biggest monthly decline since May 2012 and contributed to the biggest annual slide since 2011, data compiled by Bloomberg show.
The lira’s declines risk pushing up Turkey’s energy costs because the country is reliant on imports, Energy Minister Taner Yildiz said in televised comments from Ankara on Dec. 23. He said a drop in the exchange rate to 2.1 per dollar from 2 implies a $4 billion loss in the nation’s current account, the broadest measure of trade because it includes investments.
The current-account deficit will probably widen to 7.2 percent of gross domestic product in 2013, from 6.1 percent in 2012, according to the average estimate of 29 economists surveyed by Bloomberg.
Turkish assets have faced selling pressure since mid-2013 as part of a wider rout in emerging markets triggered by the Federal Reserve’s plans to trim its monthly bond-buying program. The U.S. central bank said Dec. 18 it would pare the program to $75 billion a month, from $85 billion.
The lira has also fallen as Turkey raised taxes. The currency weakened 1.2 percent yesterday, a day after the government said it was increasing special consumption levies on some cars, alcoholic drinks, cigarettes and mobile phones. The lira gained as much as 0.4 percent to 2.1617 per dollar today before dropping 0.4 percent to 2.1798 at 12:31 p.m. in New York.
Turkey’s foreign reserve buffer is “simply too small” to successfully intervene to defend the lira, and further declines are likely, according to Cristian Maggio, an emerging-markets foreign-exchange strategist at Toronto Dominion Bank in London.
“There is a broad set of macroeconomic imbalances that the central bank has not yet dealt with,” Maggio wrote in a client note on Dec. 27. “These mostly include inflation and the current account deficit.”
Inflation accelerated to 7.4 percent for the 12 months through December, the state statistics office in Ankara said today, meaning Turkey’s central bank missed its annual inflation target for a third year.
Turkey’s foreign-exchange reserves stood at $114.2 billion as of Dec. 20, according to data compiled by Bloomberg. That compares with $480 billion for Russia, $376 billion for Brazil and $177 billion for Mexico.
A technical indicator known as the lira’s Bollinger bands also suggests a reversal in the Turkish currency’s declines. The dollar-lira exchange rate rose above the upper limit of the band for the first time in more than a month on Dec. 18, signaling the turnaround could be imminent.
Developed by John Bollinger in the 1980s, the bands are used by technical analysts to identify the turning point in an asset’s trajectory. The limits represent two standard deviations from the 20-day moving average, implying that the likelihood of a currency moving outside the band is small.
Erdogan, who has been Turkish prime minister for more than a decade, has said the corruption probe being conducted by prosecutors is a smear campaign orchestrated by his opponents. More than 500 police officers were dismissed since the sons of cabinet ministers were among dozens detained.
The lira weakened 6.7 percent against the dollar after the arrests were made on Dec. 17, the most among 24 emerging-market currencies tracked by Bloomberg.
“The lira is attractive from a valuation standpoint, and most of the move already happened in my view,” Benoit Anne, the head of emerging-market strategy at Societe Generale SA (GLE), said by e-mail from London yesterday. “The central bank cannot afford a currency crisis on top of a political crisis.”
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