Lira Erases Turkey Election Rally as Focus Turns to Fed Liftoff

  • Emerging markets slide after U.S. payrolls beat estimates
  • Odds for a U.S. interest-rate liftoff in December climb to 70%

Turkey’s lira fell, erasing a weekly increase spurred by a surprise electoral victory for the nation’s ruling party, and bonds dropped after better-than-estimated U.S. jobs data bolstered the case for the Federal Reserve to start raising interest rates in December.

The currency weakened 2.3 percent to 2.9277 against the dollar at 7:30 p.m. in Istanbul, reversing this week’s gains. That’s the biggest decline among 24 emerging markets tracked by Bloomberg and the steepest loss for the currency in more than two months.

Turkey’s dependence on foreign cash to fund its current-account deficit, the biggest shortfall relative to the size of its economy in the Group of 20 nations, makes it among the most susceptible to changes in investor sentiment as prospects for higher U.S. rates curb the allure of emerging-market assets. The escalation of fighting in neighboring Syria and renewed violence with Kurds at home has exacerbated concerns over political risk, spurring the worst depreciation in developing nations after Brazil’s real this year.

“When emerging markets dive, Turkey dives,” Philippe Dauba-Pantanacce, an emerging- market economist at Standard Chartered Plc. It’s “more fragile” than other peers because of its current-account deficit and political risk, he said. “It structurally needs capital inflows to fund its gap.”

U.S. jobs data sends lira to steepest drop since August

Turkish assets got a boost on Monday, with a bond rally pushing yields down the most since December, after the AK Party secured enough votes in an election to run the government. 

The reversal on Friday came as futures traders boosted odds for the Fed to raise by year-end to 70 percent. U.S. payrolls gained 271,000 in October, the most this year and exceeding all estimates in a Bloomberg survey.

The data “cemented the short-term upside bias for the U.S. dollar versus the lira," said Piotr Matys, a London-based foreign-exchange strategist at Rabobank International. Matys prefers to buy the dollar against the lira on "USD/TRY dips" and targets a weakening toward 2.9429 per dollar.

Current Account

Turkey is “highly exposed to external vulnerabilities” due to persistently large current-account deficits and inadequate foreign exchange reserves, credit rating agency Moody’s Investors Service said in a presentation in Istanbul on Wednesday, pointing at concerns over reliance on external debt flows.

The gap is set to be 5 percent of gross domestic product this year, according to the median estimate of economists surveyed by Bloomberg, the worst among G-20 countries.

Yields on 10-year government notes climbed 18 basis points to 9.85 percent, bringing this week’s increase to eight basis points. The rate fell 38 basis points to 9.39 percent the day after Nov. 1 elections.

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