BOJ Defeats Basci Cut as Lira Carry Trade Revives: Turkey CreditSelcuk Gokoluk
Turkish central bank Governor Erdem Basci’s efforts to weaken the lira are being undermined by stimulus from his counterpart in Japan as investors buy the Mediterranean nation’s assets in carry trades funded by the yen.
Investors who borrowed in Japanese yen and invested in lira-denominated securities earned 4.3 percent over the past month, outpacing all major emerging-market currencies in Europe, the Middle East and Africa. The lira strengthened for a fourth consecutive day today, while yields on two-year lira notes rose after dropping to a four-week low yesterday.
Basci, who is under pressure from the government and manufacturers to revive a slowing economy, said last week the currency’s appreciation may prompt a “measured rate cut” before the central bank’s scheduled policy meeting on April 16. The yen weakened through 99 per dollar for the first time since May 2009 yesterday after the Bank of Japan said last week it will boost monthly debt purchases to 7.5 trillion yen ($80 billion) to battle deflation.
“The lira is benefiting from the BOJ action, as are other EMEA currencies,” Mihail Bozinov, an emerging-market fixed-income strategist at Morgan Stanley in London, said in e-mailed comments yesterday. Bond yields have fallen across the curve -- “signs of strong inflows and hunt for yield,” he said.
Turkey’s currency advanced 0.2 percent to 1.7829 against the dollar at 5:55 p.m. in Istanbul, taking its advance this month to 1.5 percent.
The yield on two-year lira debt rose 11 basis points, or 0.11 percentage point, to 5.95 percent, after falling 24 basis points yesterday, the biggest decline since January 2012, to the lowest closing level since March 13. Turkey offers the highest yield on similar-maturity local currency debt after Brazil and India among 19 major emerging markets.
Lira-denominated bonds have been the most popular foreign-currency debt for Japanese investors after Brazil and Australia, according to data compiled by Bloomberg.
The central bank must “definitely” cut the benchmark interest rate, Economy Minister Zafer Caglayan said in an interview with CNBC-e television yesterday.
Turkey’s economy expanded 1.4 percent in the fourth quarter, the slowest growth since a recession in 2009, the statistics office said April 1. That capped a 2.2 percent expansion last year, down from 8.8 percent in 2011. Four days later, Prime Minister Recep Tayyip Erdogan said interest rates of around 6 percent were “still high” and should be decreased further to reduce pressure on consumers.
“In view of the Turkish officials’ comments and the upcoming central bank meeting, the upside potential of the lira is quite limited,” Thu Lan Nguyen, a currency strategist at Commerzbank AG in Frankfurt, said by e-mail yesterday. The lira is unlikely to strengthen beyond 1.78 per dollar and may weaken to 1.80 after the central bank action, she said.
The lira will probably weaken to 1.81 against the dollar in the second quarter, according to the median estimate of 23 banks surveyed by Bloomberg.
Since September, Basci has reduced at least one of his three main rates every month, including a 100 basis-point cut to the overnight lending rate, the upper band of the so-called interest-rate corridor, to 7.5 percent on March 26. The central bank may lower rates again if the real effective exchange rate index exceeds the regulator’s limit of 120, he said. The index, which measures the lira against an inflation-weighted basket of currencies, rose to 119.95 last month from 119.75 in February.
“Basci will not be very aggressive in trying to prevent the lira from appreciating,” Ilan Solot, a currency strategist at Brown Brothers Harriman & Co. in London, said yesterday by e-mail. It will probably weaken as investors “start to price in greater conviction that the central bank will reduce the lower end of the interest rate corridor,” he said.
The extra yield investors demand to hold Turkish debt denominated in dollars rather than U.S. Treasuries rose three basis points to 204 today, compared with the emerging-market average of 282, according to JPMorgan Chase & Co.’s EMBI Global Index.
Five-year credit-default swaps on Turkey were little changed at 133 basis points. That’s below the level of 144 for higher-rated Russia and 164 for South Africa. The contracts, which decline as perceptions of a borrower’s creditworthiness improve, pay the buyer face value in exchange for the underlying securities or cash if a borrower fails to adhere to its debt agreements.
Foreign investors bought $3.1 billion in lira bonds in the week to March 29, the biggest weekly inflow since records began in 2005, according to central bank data last week.
“The hunt for yield is returning and Turkish rates at 5-6 percent look tempting,” Nigel Rendell, a senior analyst at Medley Global Advisors in London, said in e-mailed comments yesterday. “Carry still looks good versus yen and others and the Turkish lira is always one of the main beneficiaries in times like these.”