Lira Is Up, But Traders Aren't Rushing Back Into Turkish Assets

  • Currency little changed against the dollar since Sunday vote
  • Future of relation with EU, monetary policy remain risks

Serious Problems to Come for Turkey, Says Former Lawmaker

The bear case for Turkey’s currency may have been avoided now that the referendum is over, yet investors are hardly falling over themselves to get back into the nation’s markets.

While the currency strengthened for a second day, gaining 0.5 percent to 3.6828 per dollar at 4:38 p.m. in Istanbul, options data showed bets that it will depreciate in the coming year were greater than every other major emerging-market peer except the ruble. The lira jumped as much as 2.5 percent Monday after President Recep Tayyip Erdogan won the constitutional referendum, before ending the day 0.2 percent stronger.

Investors are concerned that cracks in relations with the European Union may grow wider amid skepticism from international observers and Turkey’s opposition parties about the fairness of Sunday’s vote. In a speech to supporters on Monday Erdogan said the nation could hold a separate referendum on its 54-year long bid to join the bloc.

Such “hawkish and nationalist rhetoric seen in the pre-referendum period could continue and this could potentially cause more stress in Turkey’s international relations,” Yarkin Cebeci, an economist at JPMorgan Chase & Co. in London, said in a note before the remarks yesterday.

Cebeci still suggests investors buy Turkey’s lira-denominated bonds in the run-up to the central bank’s interest rate decision next week.

Policy makers led by Murat Cetinkaya have raised interest rates by more than 300 basis points this year despite pressure from Erdogan’s government to avoid doing so. The central bank has promised to keep raising borrowing costs until inflation outlook improves.

Here’s a look at the mixed state of the nation’s markets:

  • Turkey’s 10-year lira bonds fell, sending the yield up 9 basis points to 10.95 percent, trimming Monday’s 25 basis point slide.
  • The rate on one-year USD/TRY cross currency swaps jumped as much as 13 basis points to 12.13 percent, near an eight-year high of 12.18 percent reached last week, a sign investors are still demanding significant yield to hold the currency.
  • Gauges of short-term implied volatility eased with one-week option contracts plunging for a third day from a three-month high of more than 25 percent to 15.9 percent.
  • Five-year credit default swaps on the country’s debt slipped less than two basis points to 232, a one-month low. The yield on the country’s dollar bonds due 2027 fell 5 basis points to 5.22 percent, extending its decline to 82 basis points since the debt was issued in January.
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