Lira Set for 1-Week Low on Bets Central Bank to Weaken Currency

The lira headed for the lowest level in a week as an index used by the central bank signaled the currency is overvalued, prompting speculation of intervention. Bond yields dropped.

The lira weakened a day after the Real Effective Exchange Rate Index surpassed 120, a threshold central bank Governor Erdem Basci said could result in policy action.

“The central bank would appreciate some depreciation in the Turkish lira,” Erkin Isik, a fixed-income strategist at Turk Ekonomi Bankasi AS in Istanbul, the Turkish unit of France’s BNP Paribas, wrote in an e-mailed note. “We thus turn bearish on lira.”

The lira lost 0.3 percent to 1.7664 against the dollar at 6:14 p.m. in Istanbul, paring this year’s gain to 1 percent.

There is a “high probability of currency intervention” as Turkey’s “low-to-medium” technology exports are “more sensitive to currency fluctuations than are counterparts who sell high-tech,” Roderick Ngotho, a London-based currency strategist at Royal Bank of Scotland Group Plc’s, wrote in an e-mailed note today.

The REER, which monitors the lira against Turkey’s trade partners, rose to 120.16 in January from 118.08 the previous month, according to central bank data. A reading of 120 or above signals excessive currency strength.

‘Turned Sour’

“The sentiment turned sour after the central bank’s REER release yesterday,” Emir Baruh, a currency trader at Akbank TAS in Istanbul, said in e-mailed comments. “We are seeing foreign and local buying.”

The median forecast of 24 banks for the lira against the dollar for the second quarter of 2013 moved to 1.80 today from 1.79 two days ago, according to data compiled by Bloomberg.

A “measured rate cut to the interest-rate corridor or policy rate is possible if the real effective exchange rate appreciates excessively,” Basci said Jan. 29.

Yields on two-year notes fell five basis points, or 0.05 percentage point, at 5.73 percent, the lowest level on a closing basis since Dec. 4.

The governor cut the overnight lending and borrowing rates by 25 basis points to 8.75 percent on Jan. 22 and raised reserve requirements for lenders to curb credit that had started to grow “faster than envisaged, amid accelerating capital inflows,” policy makers said in a statement.

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