Bloomberg News

Lira Defense to Fail as Further Falls Likely, Cinemre Says

October 05, 2011

(Updates lira in fifth paragraph.)

Oct. 5 (Bloomberg) -- Turkey’s record purchase of lira to shore up the currency is unlikely to halt declines as the debt crisis in Europe may worsen, reducing appetite for emerging markets, said Fokus Yatirim Holding AS’s Kubilay Cinemre.

A decline in emerging market currencies has “just begun” and the lira may fall another 6 percent against the dollar even as the central bank sells record amounts of dollars, Cinemre, the former chief of Bank of America Merrill Lynch & Co.’s Turkish unit, said in an interview at his asset management company in Istanbul. While Brazil continues measures such as higher taxes to try to stem currency declines, the rout across developing countries will persist, he said.

“The unorthodox policies of the Turkish central bank, Brazil’s taxes on capital outflows -- we will see more of that and there will be more volatility generally,” Cinemre said. Falls in other emerging market currencies may be as much as 10 percent, he said.

Turkish policy makers stepped up efforts to curb the lira’s tumble, selling $750 million for liras in an auction today, the most on record, after it sank more than 17 percent against the dollar this year, second only to South Africa’s rand among 25 emerging-market currencies tracked by Bloomberg. Brazil’s real is down 11 percent. The lira has dropped after the current account deficit widened to $74.6 billion in July, a record 10 percent of economic output, and the central bank slashed borrowing costs three times since December.

The lira rose 0.8 percent to 1.8730 per dollar at 6 p.m. in Istanbul. It reached a record low of 1.9092 yesterday. The currency traded at 1.5299 at the start of the second quarter and 1.4281 a year ago.

Protection

“You would find 1.85 for the lira against the dollar a lot at the beginning of summer,” Cinemre said. “I am not thinking that way, the decline is happening and I am trying to protect myself. If the Europeans get their act together the trade will be off.”

Cinemre said he is buying options on the lira weakening further against a basket of dollars and euros.

There is an 88 percent chance that the currency will fall to 1.9 per dollar by the end of 2011 and a 47 percent chance it will decline to 2 per dollar, according to implied probability calculated from currency options.

The central bank is committed to stopping the lira’s depreciation and the currency may strengthen to 1.82 per dollar should the global situation not worsen, HSBC strategist Murat Toprak said in response to Bloomberg questions by email from London. Investors who expect the lira to depreciate will “suffer” as the bank intervenes with large dollar auctions, Luis Costa, a London-based strategist with Citigroup Inc., said in a report e-mailed to clients.

The central bank also doubled the amount of reserves banks may keep in foreign currency today to 20 percent of lira liabilities, a move it said would boost its reserves by as much as $3.6 billion. It also cut reserve requirements banks must deposit to cover foreign currency liabilities, releasing an extra $1.3 billion to the market.

Cinemre also recommended calls on leading European and U.S. banks. He said investors should consider purchasing shares in “cash-rich” Turkish companies such as media and energy group Dogan Sirketler Grubu Holding AS, and the biggest listed banks including Turkiye Garanti Bankasi AS.

Fokus specializes in advisory and asset management services. Cinemre owns the company with Faruk Isik, formerly chairman of Bank of America in Turkey, and Uzay Kozak, ex-chief executive of the Turkish unit of Lehman Brothers.

--With asssistance from Benjamin Harvey. Editors: Mark Bentley, Laura Zelenko

To contact the reporter on this story: Selcuk Gokoluk in Istanbul at sgokoluk@bloomberg.net

To contact the editor responsible for this story: Gavin Serkin at gserkin@bloomberg.net


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