Turkish Markets Rally as Erdogan Adds to Rate-Hike Speculation

  • Lira, bonds, stocks climb as central bank tightens liquidity
  • Erdogan says institution can ‘spoil’ currency speculation game

Lira in Worst Rout Since 2008: Is There Any End in Sight?

Turkey’s beleaguered markets are finally finding some support.

The nation’s stocks, bonds and currency jumped Thursday after the nation’s central bank didn’t offer any funding to lenders through its weekly repurchase auction, tightening the availability of cash and adding to speculation of a rate increase this month. The lira extended its gain after President Recep Tayyip Erdogan called on the regulator to “spoil” the economic "game" being played against Turkey.

The decision to skip the auction marks the first major step by the central bank to stem a more than 9 percent slump in the lira this year. While the institution has been under political pressure to keep interest rates low, President Erdogan said Thursday that it should take “necessary measures to ruin this game.” The central bank is due to review policy on Jan. 24.

“President Erdogan’s comments on the central bank having the ability and the means against the lira weakness fueled expectations for additional measures like direct intervention in the currency market,” said Ibrahim Aksoy, investment strategist at Istanbul-based HSBC Asset Management. That is “supporting gains in the lira, hence in the bonds and stocks.”

The lira advanced 2.2 percent to 3.7891 per dollar as of 5:15 p.m. in Istanbul. It fell a combined 8.2 percent in the five days through Wednesday and touched a record 3.9415.

The yield on the nation’s 10-year bonds fell 42 basis points to 11.52 percent, and the Borsa Istanbul 100 Index jumped 4.3 percent, with volume climbing to the highest level since July 18, the first trading day following last year’s coup attempt.

The central bank’s measure on Thursday represents “a major tightening in lira liquidity conditions,” Erkin Isik, an Istanbul-based strategist at TEB, said by e-mail. It “signals that they will be hiking rates in the next MPC meeting.”

Still, some investors still remain skeptical about the durability of the rally.

“Turkey is not yet out of the woods and I expect the depreciation to resume soon,” said Guillaume Tresca, a strategist at Credit Agricole SA in London. The “next step is FX interventions but I don’t think it will be enough. The central bank has to hike rate substantially to stabilize markets.”

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