Turkish Lira Weakens 4th Day Against Euro on LTRO Anticipation

The Turkish currency weakened for a fourth day against the euro as the common currency strengthened on anticipation of large cash repayments by European lenders via the European Central Bank’s Longer-Term Refinancing Operations.

The lira depreciated 0.2 percent against the euro to 2.3645 by 5:20 p.m. in Istanbul in its fourth day of losses. The Turkish currency appreciated 0.1 percent at 1.7699 against the dollar and yields on benchmark two-year notes were unchanged at 5.84 percent.

The ECB’s LTRO programs in December 2011 and February 2012 reduced the risk of a systemic crisis blowing the single currency apart. Along with ECB President Mario Draghi’s July pledge to do “whatever it takes” to preserve the euro, the cash infusions helped stem a rout in Spanish and Italian bonds. Turkey sold 42 percent of its exports to the European Union in November, according to statistics office website.

“Mostly this comes from EUR strength, rather than TRY weakness,” Thu Lan Nguyen, a currency strategist at Commerzbank AG, said in e-mailed comments. “People are anticipating tomorrow’s announcement of the first LTRO repayment volume and should it turn out to be quite high, this would be an indication of a considerable improvement of financial market conditions, particularly for Euro-banks.”

The central bank’s Monetary Policy Committee reduced its overnight borrowing and lending rates by 25 basis points each on Jan. 22 on concern the lira may become overvalued as Turkey’s stock and bond markets draw in money on bets of a second upgrade by a rating company this year.

Turkey’s currency has gained 1.5 percent in the past month against the dollar. Central bank Governor Erdem Basci has said he’s monitoring an index of the currency’s real exchange rate, weighted against Turkey’s trading partners, and may act to weaken the lira if it appreciates. As capital inflows accelerate, bank credit has started to grow faster than expected, the central bank said in its rates decision published on Jan. 22.

Turkey wants to keep loan growth at about 15 percent and faster expansion may cause inflation to exceed this year’s 5.3 percent forecast, Basci told CNCB-e television in Davos today.

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