Turkish Lira Falls, Volatility Climbs Before Sunday's Referendum

  • UBS sees lira rallying 2 percent to 3 percent on a ‘yes’ vote
  • Currency losses on a ‘no’ vote seen capped at 3.83/dollar: SEB

The lira fell and bonds gained on the last trading day before U.S. and European markets close for Easter holidays, as Turks prepared to vote on constitutional changes that will endow President Recep Tayyip Erdogan with sweeping executive powers.

With European markets set to remain shut Monday, many traders have their last opportunity Thursday to take positions before trading resumes after Sunday’s referendum. The Turkish currency dropped 0.5 percent to 3.6675 per dollar as of 1:05 p.m. in Istanbul, after climbing earlier to 3.6429. One-month implied volatility on dollar-lira options rose to 18.6 percent, the highest since January, indicating heightened expectations for wider price swings following the vote.

The worst-performing emerging-market currency of the year has gained 1.7 percent this week, on track for its first advance in three weeks. The vote on April 16 will be the fifth nationwide ballot since early 2014. Some investors say a ‘yes’ vote will prompt a relief rally in Turkish assets as Erdogan’s role is formalized, putting an end to months of political turmoil compounded by a failed coup attempt, credit-rating downgrades and the lira’s slump to a record.

While the lira performed well versus peers this week, it’s still lower in the month, “so it’s premature to claim that the market started pricing a ‘‘yes’’ vote,” said Erkin Isik, a strategist at Turk Ekonomi Bankasi AS.

Pollster Gezici said Thursday that it sees the “yes” vote slipping to 51.3 percent, down from 53.3 percent in the company’s April 1-2 survey. Polls have been showing opponents and supporters of the proposed constitutional amendments lining up in roughly equal numbers behind the proposal to make the presidency, rather than parliament, the nation’s main repository of power. Many polling companies have reported too many undecided voters to accurately forecast the result.

  • Polls point to a razor-thin margin in favor of ‘‘yes,’’ but the result isn’t a foregone conclusion, said Per Hammarlund, SEB’s Stockholm-based chief emerging-market strategist
    • Still, he expects ‘‘yes’’ to prevail and the lira to advance to 3.61 or even to 3.57 in the days following the vote. A ‘‘no’’ outcome would see the lira sell off, he says, but losses would be capped at 3.83 by the currency’s ‘‘high carry at close to 10 percent”
  • Lira yields have climbed as the central bank pushed up average funding costs by more than 300 basis points this year to shore up the exchange rate after it fell to a record in January. The currency’s forward implied one-year yield is 12 percent, the highest among emerging-market peers other than Argentina
  • Pricing appears to be skewed toward a “yes” vote, but not sufficiently so as to preclude a tactical/short-term relief rally after the outcome, UBS analysts including Manik Narain wrote in a report
    • They say the currency could appreciate another 2%-3% assuming the amendments are accepted this weekend
    • A “no” vote is likely to result in much greater uncertainty, weighing on the lira and other asset classes, requiring further monetary tightening and creating downside risks to growth, they wrote
  • The central bank is scheduled to meet next on April 26 and has already pushed its average weighted cost of funding to the upper limit of its current policy framework by keeping bank funding tight
  • The yield on Turkey’s 10-year notes fell 6 basis points to 10.89 percent, declining for a fourth day to the lowest level in more than two weeks
  • “I think we’re slowing seeing some profit taking,” Burcin Metin, head of foreign exchange at ING in Istanbul. “People are also going on holiday and trimming their positions.”

— With assistance by Inci Ozbek

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