Dark Days Ahead for Turkish Lira as Top Analysts See Drop

Rising U.S. bond yields will weigh on an already battered lira this quarter as Turkey’s dependence on foreign capital is exposed by a stronger dollar, according to the currency’s top forecasters.

The lira will drop 0.5 percent from yesterday through year-end, according to the median of the five most accurate analysts last quarter, when the currency suffered its biggest decline in three years. The predictions ranged from a gain of 3.6 percent to a drop of 5.4 percent, forecasts compiled by Bloomberg show.

Turkey’s currency is less than 5 percent away from its January record low as investors weigh the consequences of an eventual interest-rate increase by the Federal Reserve and as the war in neighboring Syria sparks Kurdish unrest at home. The lira’s fate may hang on whether the central bank in Ankara responds to the Fed by raising borrowing costs in a bid to limit capital outflows and deeper losses, according to Credit Suisse Group AG.

“We are at a difficult crossroads because the central bank can’t afford further depreciation,” Anezka Christovova, a strategist in London at Credit Suisse, the best forecaster for the lira in the period, said by phone on Oct. 8. “If the global environment deteriorates more than we expect, the pressure might rise to hike rates. We are not sure that they are ready to do that at the moment.”

More Weakness

The currency slid 7 percent in the third quarter and lost 13.5 percent in the past 12 months, the fourth-biggest drop among 24 developing countries monitored by Bloomberg. To stem the retreat to a record 2.39 per dollar in January, the central bank more than doubled its key interest rate to 10 percent, before lowering it to 8.25 percent in three steps through July.

Facing government pressure to cut borrowing costs as economic growth slows, central bank Governor Erdem Basci is also contending with inflation that’s exceeded his 5 percent target by more than three percentage points since March.

The selloff in Turkish assets worsened last month after the Fed signaled it would start raising interest rates in mid-2015 as the U.S. economy recovers, helping spur gains in the dollar.

“We see the strain continuing throughout the next months,” Przemyslaw Kwiecien, the chief economist at X-Trade Brokers Dom Maklerski SA, said by phone on Oct. 7. “What the market is pricing in terms of Fed rate hikes still seems to be behind the curve.”

Fed Minutes

X-Trade, the fourth-best forecaster in the three months through Sept. 30, projects the lira will reach 2.28 per dollar by year-end, versus 2.2821 by 4:26 p.m. in Istanbul.

The currency rose two days ago after minutes from the last Fed meeting showed policy makers were concerned the stronger dollar posed potential risks to the U.S. outlook. Turkish stocks jumped the most in the world yesterday and yields on its two-year notes, the worst performers in emerging markets in the past month, fell 18 basis points to 9.6 percent, before climbing to 9.67 percent today.

While Fed minutes “clearly change the short-term positioning,” they probably won’t be enough to “capture emerging-market flows to the lira if geopolitical tensions escalate,” Ipek Ozkardeskaya, a currency strategist at no. 5-ranked Swissquote Bank SA in Geneva, said by e-mail.

Turkey’s reluctance to help repel Islamic State’s onslaught on Kobani, across the border in Syria, sparked protests this week across southeastern Turkey.

The tension risks compounding the bearish outlook, according to Lee Hardman, a foreign-exchange strategist at Bank of Tokyo-Mitsubishi UFJ Ltd., the second-best forecaster last quarter, who expects the lira to weaken to 2.3 per dollar by Dec. 31.

“I’d anticipate it will remain one of the worst performing emerging-market currencies,” Hardman said by phone from London yesterday. Turkey’s “reliance on short-term external financing leaves it more vulnerable to a potential shift higher in U.S. yields,” he said.

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