Turkish Lira Strengthens as Central Bank Tightens Repo Funding

Turkey’s lira strengthened for the first time in three days and bond yields rose after the central bank offered no funding at a repo auction for a second time in little over a week.

The yield on benchmark notes climbed after the bank refrained from lending at its policy rate to support the currency. It offered no funding at the June 11 one-week repo auction and sold $250 million in its first currency auction this year as anti-government protests sent the lira to its weakest level since 2011. The exchange rate is still 2.3 percent weaker against the dollar in the past month and the lira traded at 2.2043 versus its euro-dollar basket at 5:24 p.m. in Istanbul.

The “2.20 basket level is the place the central bank feels uncomfortable and this triggers the lira tightening,” Bugra Bilgi, an Istanbul-based hedge fund manager at Garanti Asset Management, wrote in an e-mailed note today.

The yield on two-year notes closed unchanged at 6.81 percent. The lira strengthened 0.1 percent to 1.8841 and stocks also rose for the first time in three days, with the Borsa Istanbul National 100 index climbing 1.5 percent.

The yield surged 57 basis points yesterday after Prime Minister Recep Tayyip Erdogan accused the main opposition party of inciting weeks of protests and vowed to strengthen police in “every way” to fight a “conspiracy” by traitors and foreign agitators. He blamed “certain capital groups, the interest rate lobby and certain organizations inside and outside” Turkey for organizing protests, in his address to the Justice and Development Party at Parliament in Ankara.

The cost to protect Turkish debt against a default rose one basis point to 164, according to data compiled by Bloomberg. That compares with 169 basis points for Brazil’s credit default swaps.

Emerging-market stocks fell for a second day as investors await the Federal Reserve’s policy announcement today for a signal on when it will begin to slow monthly bond purchases.

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