Bloomberg News

Lira Gains Most in Five Weeks as Bank Challenges Currency Bears

October 06, 2011

Oct. 6 (Bloomberg) -- The lira climbed, posting the biggest two-day increase in five weeks, after the central bank sold $350 million for liras in a challenge to investors who are betting on a weaker currency.

The lira rose as much as 1.8 percent against the dollar in Istanbul after the central bank offered to sell as much as $1.35 billion for a second day. It traded 0.8 percent higher at 1.8527 at 4:13 p.m. after about a quarter of the offer was sold. The bank got $2.04 billion of bids, the most since the daily auctions began on Aug. 5.

“The central bank is probably pursuing a cautious sale strategy and does not want to use all its ammunition at a level near 1.80,” Levent Guven, a director at the treasury department of the Turk Ekonomi Bankasi AS in Istanbul, said in an e-mailed response to questions.

Policy makers have intensified their support for the lira after it sank more than 16 percent against the dollar this year, making it the second-worst performer among 25 emerging-market currencies tracked by Bloomberg after South Africa’s rand. The lira sank as the current-account deficit grew to $74.6 billion, a record 10 percent of economic output, in July and the central bank cut interest rates three times since December to help guard the economy from a global slowdown.

“The central bank’s recent moves show that it means business, which is actually what local households and corporates wanted to see,” Simon Quijano-Evans, a London-based economist at ING Groep NV, said via e-mail.

The currency has lost one-third of its value against the dollar since the start of the global economic crisis in September 2008, the biggest loser among emerging markets.

Punch Ball

The Ankara-based bank also offered $1.35 billion in an auction yesterday, selling a record $750 million, after the lira slumped to an historical low of 1.9096 per dollar on Oct. 4. The currency has rallied 4 percent from that low.

“I expect that the lira will remain a punch ball between markets and the central bank in the short run,” said Daniel Lenz, chief emerging-markets strategist at DZ Bank AG in Frankfurt. “Now the central bank is in the lead with tailwind from better sentiment but I would not be surprised if markets test the bank’s willingness again.

‘Precarious’

Today’s dollar sale increased the total amount of foreign- currency reserves spent by the central bank in the auctions to $4.3 billion since Aug. 5. The bank had $87.5 billion in reserves, excluding gold, as of last week, dwarfed by Russia’s $526 billion in foreign currency and gold. It had $92 billion in reserves on Aug. 5.

The policy of increasing dollar sales to this level is “a rather precarious stance to maintain,” Ozhan Antero Atilla, an emerging-market strategist at Danske Bank A/S in Copenhagen, said in an e-mailed response to questions.

The central bank raised the amount offered at the dollar auctions after cutting reserve requirements for banks’ foreign- currency liabilities yesterday, releasing an additional $1.3 billion in liquidity to the market. It also increased the limit of foreign currency reserves banks can keep with the central bank to 20 percent of lira liabilities from 10 percent, a move it said would bolster its own reserves by $3.6 billion.

Bond yields fell after governor Erdem Basci said in an e-mailed statement that he expects core inflation to peak at 8 percent in the fourth quarter.

Yields on two-year benchmark bonds slid 11 basis points to 8.43 percent, a RBS Local Bond Index showed, in their second day of declines.

“The risks are still skewed towards weaker lira and higher yields, although on the former the worst so far seems to have passed, and on the latter the global events still take priority over domestic factors,” Danske Bank’s Atilla said.

The extra yield investors demand to hold Turkish dollar bonds rather than U.S. Treasuries narrowed 14 basis points to 357, compared with a seven basis point rise for emerging-market debt, JPMorgan Chase & Co. indexes show.

--Editor: Mark Bentley, Linda Shen

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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