Turkish Lira Heads Toward Record Low as Post-Coup Purge Widens

  • Societe Generale recommends selling lira against dollar
  • Central bank lowers overnight lending rate by 25 basis points

The 'Doom and Gloom' Facing Turkey's Lira

Turkey’s lira traded within 1 percent of an all-time low as a purge of the country’s institutions and the prospect of a junk rating from Moody’s Investors Service deepened concern about the fallout from last week’s failed coup.

The lira fell 0.4 percent to 3.0549 per dollar as of 12:28 p.m. in Tokyo, tracking a drop in emerging-market currencies after the International Monetary Fund cut its world growth forecast. The Turkish currency reached 3.0623, the lowest since September when it sank to an unprecedented trough of 3.0752.

A failed attempt by a military faction to overthrow the government on Friday has thrown Turkish markets into disarray, while Moody’s said it will “assess the medium-term impact” on the country’s growth and institutions as it reviews its Baa3 investment-grade rating. Purges have already seen more than a sixth of the judiciary removed and state-run TRT reported the Council of Higher Education is seeking the resignation of 1,577 university deans, raising concern about the scale of the crackdown.

“What we’re looking at with the downgrade and all the uncertainty is a potential push beyond September levels,” said Wu Mingze, a foreign-exchange trader in Singapore at INTL FCStone Inc., a Nasdaq-listed global payments-service provider. “If more negative news starts to fly in, this will create a climate of fear, which will be negative for the lira.”

Rate Cut

Turkey’s central bank lowered its overnight-lending rate by 25 basis points to 8.75 percent on Tuesday, matching economist estimates in a Bloomberg survey. Policy makers, who reduced the overnight rate 200 basis points this year, said pressure from rising prices is now building. Inflation “may display a marked increase in the short term due to developments in unprocessed food and tobacco prices,” the central bank said in its statement.

Turkey depends on capital inflows to finance a current-account deficit and some investors were betting the central bank would opt to prop up lira assets by keeping rates unchanged to maintain their allure to foreign investors amid the turmoil.

Sell Lira

Societe Generale SA recommended selling the lira against the dollar as the shift toward more autocratic rule “would likely wreak severe damage on market confidence, dampen private investment, and ultimately weigh on Turkey’s growth prospects,” London-based emerging-markets strategist Phoenix Kalen wrote in a note dated Wednesday.

Turkey’s lira fell the most in eight years when the coup erupted in the final hours of trading last week. It rebounded Monday as local investors took advantage of the slump.

In a sign investors are losing interest in adding to their holdings in the country after this weekend’s political upheaval, Turkish lender Yapi Kredi Bankasi AS canceled a $550 million bond sale, which had priced on July 12, according to people familiar with the transaction who are not authorized to speak publicly and asked not to be identified. Sekerbank TAS on Sunday postponed planned meetings with international investors ahead of a possible bond sale.

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