Bloomberg News

Lira Advances, Bonds Rally as Fed Decision Eases Deficit Concern

January 26, 2012

Jan. 26 (Bloomberg) -- The lira gained to its strongest level in 2 1/2 months and bonds rallied the most in seven years after the Federal Reserve signaled plans to maintain near-zero interest rates through 2014, easing investors’ concern that the funding of Turkey’s current-account deficit.

The Turkish currency appreciated 1 percent 1.7879 per dollar as of 5:05 p.m. in Istanbul, from yesterday’s close in New York. That the highest level since Nov. 15. The yield on benchmark two-year debt fell 75 basis points, or 0.75 percentage point, to 9.62 percent, in the biggest fall since at least 2005 when Bloomberg started tracking the index.

“As long as the Fed is flooding the market with liquidity, capital inflows to Turkey are likely to continue, which are necessary to finance the current-account deficit,” Thu Lan Nguyen, a currency strategist at Commerzbank AG in Frankfurt, said in e-mailed comments.

The Fed said yesterday it sees “exceptionally low” interest rates through 2014, having previously pledged to refrain from raising borrowing costs until at least the middle of 2013. Turkish yields soared 390 basis points last year, the most since 2006, and the lira weakened 18 percent against the dollar in the biggest depreciation worldwide as a widening current-account deficit hurt investor confidence.

“The current account deficit will be easily financed in this environment and rates look too cheap,” Bugra Bilgi, a hedge fund manager at Garanti Asset Management in Istanbul said, in e-mailed comments.

Deficit Narrows

The Fed’s plan will provide more liquidity to be used for “carry trades for a long time,” Tufan Comert, a strategist at Garanti Securities, said in a client note. Investors should sell the U.S. dollar versus the lira at levels above 1.80, saying the lira may appreciate to 1.75 per dollar, he said.

The Turkish current-account deficit narrowed in November for the first time in two years, bringing the cumulative 12- month total to $77.8 billion, still equivalent to about 10 percent of gross domestic product. A shortfall of that scale represents a risk to economic stability, Fitch Ratings said in November.

--Editors: Ash Kumar, Stephen Kirkland

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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