Top Forecaster Sees 6% Lira Meltdown Before Vote: Turkey Credit

The Turkish lira, the worst performing major currency in Europe, the Middle East and Africa since June, will plunge in the first quarter as a corruption probe roils markets before elections, the top forecaster said.

The lira will fall 5.5 percent to 2.31 per dollar in the first three months, then weaken to 2.42 by June before stabilizing, according to Przemyslaw Kwiecien, chief economist at X-Trade Broker Dom Maklerski SA in Warsaw, the most accurate analyst in the fourth quarter. The drop risks weighing on bonds as the March vote for local officials approaches, he said.

Anti-government protests that began in late May kicked off the lira’s decline, which accelerated in December as an ongoing graft investigation ensnared three members of Prime Minister Recep Tayyip Erdogan’s cabinet. The crisis has sparked a selloff in Turkish debt, with two-year note yields rising the most among 19 emerging markets since the end of the first half.

“If you have unstable situations like we have in Turkey right now and you add elections to this, obviously this is a clear warning to investors to be cautious,” Kwiecien said in a phone interview two days ago.

Turks are scheduled to vote for city mayors on March 30, followed by a presidential ballot in August.

Graft Probe

Prosecutors have detained dozens, including the sons of three cabinet ministers, in a probe that became public on Dec. 17. The lira broke successive records and hit an all-time low of 2.1948 on Jan. 6 as tensions deepened between the government and followers of U.S.-based Islamic cleric Fethullah Gulen who are influential in the judiciary and police force.

“Until the recent political turmoil, we were quite optimistic for the lira,” Soeren Hettler, senior foreign-exchange analyst in Frankfurt at DZ Bank AG, the fifth most-accurate forecaster, wrote in e-mailed comments yesterday. The lira will weaken to 2.35 by year-end “as political stability seems to be profoundly endangered,” he said.

The lira gained 0.1 percent to 2.1842 versus the dollar at 6:40 p.m. in Istanbul today. The currency slid 6.9 percent in the past month, the biggest drop among 24 emerging markets tracked by Bloomberg. The Argentinian peso, the second-worst performer, depreciated 5.4 percent in the period.

Erdogan said on Dec. 25 an “interest-rate lobby” unhappy with the current level of Turkish rates and working hard to force an increase was behind the corruption probe. “Turkey will deal a final blow to the interest-rate lobby,” he said.

Placing Blame

With “local elections in view, Erdogan might well be eager to continue to place the blame on internal and external powers for threatening the wealth of his country -– to the displeasure of international investors,” Hettler said.

The central bank sold $3.25 billion for liras in the last week of December and offered $100 million every day this month to support Turkey’s currency and help curb inflation. Governor Erdem Basci predicted in August the lira would strengthen to 1.92 per dollar by the end of last year. The lira closed at 2.1482 on Dec. 31.

“To me the worst is over,” Benoit Anne, London-based head of emerging-market strategy at Societe Generale SA, wrote in e-mailed comments on Jan. 3. “A quick rebound to 2.10 is highly likely in my view” on the realization that lira is now “quite cheap” and the “panic is over,” he said.

Societe Generale didn’t figure among the top six forecasters for the lira-dollar ranked by Bloomberg. The classification is based on criteria including timing and directional accuracy and used foreign-exchange predictions on Bloomberg for the four quarters ended Dec. 31.

Technical Analysis

Technical strategists at Citigroup Inc., the second most-accurate forecaster, kept their target for the lira at the 2.60-per-dollar area, saying in a Jan. 2 note that “certain local-market currencies may continue to face significant pressure this year.” The analysts said the target was based on an inverted head-and-shoulders pattern.

Other technical indicators suggest the lira may weaken further. The monthly moving average convergence-divergence, or MACD, which provides buy and sell signals, shows the dollar is in a bullish long-term trend against the lira, with the indicator located above both the zero and signal line. At the same time, the 14-month relative-strength index, which was at 76 yesterday, may indicate a temporary rebound in the lira, or a pause in the drop, before resuming its longer-term decline. A reading above 70 indicates the currency may be poised to recover.

Yields Climb

Foreign investors sold Turkish bonds for a third consecutive week as of Dec. 27, bringing total sales since the probe started to $1.92 billion. This reduced foreigners’ Turkish bond holdings to $53 billion, the lowest since August 2012, according to central bank data published on Jan. 3.

Since the end of June, the yield on two-year lira notes climbed 213 basis points, or 2.13 percentage points, to 10.02 percent yesterday. The 10-year rate increased 144 basis points to 10.18 percent.

“I don’t think we have found a stable level for Turkey long-end yield yet,” Luis Costa, a strategist at Citigroup in London, said in e-mailed comments two days ago. “There could be more upside in yields. It will be established when foreign investor outflows subside and that hasn’t happened yet.”

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