Turkish Lira Slips to Record Low on Fed Outlook; Bonds Decline

  • Currency weakens to record 3.1272 against the dollar
  • Odds of December increase to U.S interest rates climb

The lira weakened to an all-time low as a pause in easing by Turkey’s central bank failed to offset mounting speculation the Federal Reserve will raise interest rates this year.

Turkey’s currency was little changed against dollar at 3.1128 as of 5:23 p.m. in Istanbul, after reaching a record-low 3.1273. The yield on 10-year bonds climbed 10 basis points to 10.09 percent, the highest since July on closing basis. Local markets closed at mid-day for a national holiday.

The central bank’s pause last week in a seven-month rate-cutting cycle hasn’t staved of a slump in the currency as investors grow wary of emerging markets amid increasing bets the Fed will raise rate in December. At Thursday’s final inflation briefing of 2016, Turkey’s central bank chief said data would determine the “direction” of the next rates decision.

“The surprise pause to rate-cuts by CBRT was not considered enough to contain the depreciation pressure,” Erkin Isik, a strategist at Turk Ekonomi Bankasi AS in Istanbul, wrote in an e-mailed note. The central bank’s inflation report yesterday suggests it “will stick to its current stance for some time but will look for opportunity to continue simplification process,” saying he continues to see downside risks to the currency.

Turkey is vulnerable to shifts global investor sentiment as it depends on capital inflows to finance it’s current account deficit, which is set to start widening as a percentage of output this year. The odds of a Fed rate hike in December climbed to 76 percent on Thursday, from 68 percent a week ago, after a report showed the U.S. economy grew more than forecast in the third quarter.

Turkish stocks also retreated, with the Borsa Istanbul 100 Index falling for a fourth day. Declines in the local market follow a retreat among global peers that is driving the MSCI Emerging Markets Index to its first monthly drop since May.

The Turkish regulator has lowered the cost of overnight lending by 250 basis points since March -- amid government calls for easier credit conditions -- as it seeks to simplify it’s multi-rate monetary policy framework by narrowing its so-called interest rates corridor and, ultimately, provide funding to commercial banks through a single policy rate.

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