Turkey's Lira Looks More Vulnerable Than Before to Geopolitics

JPMorgan's Gartside Says Investors Should Focus on Emerging Markets

Lira traders are on edge as they brace for the prospect of a further deterioration in U.S-Turkey relations, a risk amplified by the nation’s deteriorating current account.

The share of this $44-billion shortfall that’s financed through the purchases of bonds and stocks has grown in recent months to the biggest in nearly three years, according to central bank data and Bloomberg calculations. Relying so heavily on capital that can flee the country may leave the currency exposed to a turn in investor sentiment.

Fickle Funding

Turkey's reliance on portfolio inflows grows

The lira offers the highest volatility-adjusted yield among major emerging-market peers. The central bank can protect its carry appeal by keeping rates on hold when it meets on Thursday, as expected in a Bloomberg survey.

Even so, traders digesting the risk of a military confrontation with Washington-backed militia in Syria have sent the currency plunging more than 1 percent against the dollar so far this week, compared to gains of about 1 percent for the Mexican peso and South African rand.

The developments come at a time when the trade balance “has been deteriorating at one of the fastest rates across emerging markets, and the underlying financing has shown no sign of improvement,” said Manik Narain, a strategist at UBS Group AG in London, adding he sees the lira weakening to 4.5 per dollar by year-end.

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