Lira Bears Back Off as Turkey Yield Offensive Quells Volatility

  • Buy lira versus euro, Morgan Stanley and Societe Generale say
  • Currency trims biggest loss among emerging markets this year

The gloom over Turkey’s lira is lifting.

The worst-performing emerging-market currency in the past year has climbed 6.4 percent from January’s record low against the dollar amid policy measures that boosted its yield appeal. Morgan Stanley and Societe Generale SA now recommend buying the lira against the euro, citing a responsive central bank and light positioning that leaves the Turkish currency poised for a rebound.

The option market is adding to signs of improving confidence. Implied volatility on one-month contracts has dropped to 13.7 percent from last month’s peak of 24 percent, while the premium for the right to sell the lira in a month over that to buy has fallen to 2.4 percentage points from as much as 4.4 in November.

The lira slid this year amid rising U.S. yields and speculation that, after holding benchmark rates in December, Turkey’s central bank was reluctant to support the currency with higher borrowing costs. Policy makers have since raised rates, pushing up the short-term lira yield to near 11 percent. Last week, Governor Murat Cetinkaya said the central bank is monitoring inflation expectations and “if needed, further monetary tightening will be delivered.”

“The central bank has maintained relatively hawkish rhetoric on monetary policy, and continues to gradually push up the average cost of funding, which is a positive,” James Lord, London-based emerging-markets strategist at Morgan Stanley, said in e-mailed comments. “The lira hasn’t really participated in the emerging-market rally so far, and positioning is light.”

The lira climbed 0.7 percent to 3.9061 per euro on Monday as of 6:30 p.m. in Istanbul, trimming its loss in 2017 to 5 percent. It gained 0.4 percent against the dollar. Morgan Stanley has suggested its clients sell the euro against the lira for a move to 3.65. Societe Generale has made a similar recommendation with target at 3.5478.

“Continued vigilance on the part of the central bank can help the lira to embark on a gradual recovery over the coming weeks, helped further by unwinding of heavily short positioning,” Phoenix Kalen, London-based strategist at Societe Generale, wrote in an e-mailed note on Friday.

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