Lira Keeps Gains After Embassy Blast as PMI Buoys Rate Outlook

The lira remained higher after a blast at the U.S. embassy in Ankara, heading for the strongest level in 11 months, as data showed Turkish output grew at the fastest pace in 22 months. Benchmark bonds climbed.

The advance added to five consecutive months of gains through January, the longest stretch since July 2007. A rise in the purchasing manager’s index to 54 fueled speculation the central bank won’t cut interest rates this month, underpinning the currency’s advance.

“The data is supporting a broader strengthening of economic activity,” Murat Yardimci, head of trading at ING Bank AS in Istanbul, said by telephone today.

The lira appreciated 0.6 percent to 1.7482 per dollar by 6:15 p.m. in Istanbul, poised for its highest level since Feb. 20, even after the explosion that killed at least one person and damaged the back gate outside the embassy complex. Yields on two-year benchmark bonds closed five basis points lower at 5.8 percent, retreating for the first time in three days.

The lira jumped the most in two weeks yesterday after December’s trade deficit narrowed to $7.18 billion, compared with the median estimate of $9.45 billion in a Bloomberg survey of 10 economists.

Turkish manufacturing conditions improved for a fifth month as an increase in domestic business helped propel new orders at the fastest pace since March 2011, according to HSBC Holdings Plc.

Central bank Governor Erdem Basci said on Jan. 29 “a measured cut” in interest rates is possible if the real effective exchange rate, or REER, appreciates “excessively.” The bank deploys the REER to monitor the lira against Turkey’s trade partners and considers a reading of 120 or above as excessive currency strength.

“We are estimating the REER at 118.5 and this is reducing the chances of a rate cut this month as well,” said ING’s Yardimci. The rate was 118.3 in December, according to the central bank’s website.

The currency has gained 1.8 percent this year even as the Turkish central bank cut interest rates by 0.25 percentage point on Jan. 22 and Moody’s Investors Service dashed hopes for an imminent rating upgrade in the market, saying “further progress” is needed in lowering the current-account gap and leaving it one level below investment grade.

“We expect the U.S. dollar-Turkish lira to remain within its trading range between 1.7350 and 1.8400 in the coming months,” Thu Lan Nguyen, a currency strategist at Commerzbank AG in Frankfurt said in a note published yesterday.

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