Turkey central bank move fails to stem lira’s slide on politics

Bloomberg

Traders were unimpressed with the Turkish central bank’s latest attempt to support the lira, which is wobbling amid concern about the fallout from a US court case, tension with NATO, and President Recep Tayyip Erdogan’s new calls for lower interest rates.
While the lira jumped as much as 1.4 percent in thin Asia trading to touch a high of 3.8228 per dollar after the central bank provided details of its non-deliverable forward exchange auction mechanism, it slipped back to trade near a fresh low for the day as of by 11 am in Istanbul. The currency has lost 9.4% versus the dollar this year and 19 percent against the euro, the most among major currencies worldwide.
To stem further depreciation, the monetary authority planned to sell local banks one-, three- and six-month forward contracts with a $3bn cap through year-end, it said, offering some relief to companies, which have a more than $200 billion foreign-currency short position. The instrument is designed to protect the companies against any drops in the currency while taking some speculative demand out of the market.
Foreign appetite for the nation’s assets has waned amid deteriorating relations with the US and Europe, while Erdogan has gotten closer to Russian President Vladimir Putin, who he’ll meet this week for the second time in nine days. Erdogan’s attack on the central bank on Friday, meanwhile, is reviving concern that policy makers will come under pressure to drop rates rather than raise them, as many investors are urging.

CORPORATE DEBT
“We have our doubts whether the overall auction amount, announced for the rest of this year, will suffice to ease the pressures,” said Gokce Celik, an economist at QNB Finansbank. The central bank’s operations still “might help alleviate the volatility in the spot market by preventing corporates’ rush to buy foreign exchange.”
Turkey had said it withdrew troops from a NATO exercise, citing drills in which Erdogan and the nation’s founder, Mustafa Kemal Ataturk, were depicted as enemies. NATO Secretary General Jens Stoltenberg called Erdogan to apologise for the “scandal,” the Turkish presidency said late Saturday. Investor attention is also turning to a high-profile case in the US that threatens to expose how powerful figures in Turkey may have helped undermine US sanctions on Iran. Among those charged are Reza Zarrab, a Turkish-Iranian gold trader, a former Turkish economy minister and executives from a state-run bank.
The lira slid as much a 0.6 percent on Monday to 3.8986 per dollar. The yield on the nation’s 10-year bond jumped as much as 13 basis points to 12.68 percent, a record. Data last week showed that local investors have also turned against their currency. Resident investors bought more than $250 million worth of foreign exchange, putting an end to a seven-week run of hard currency sales that had offered the lira some support. Those sales might be one of the reasons the central bank decided to step in, according to Nomura International Plc’s Inan Demir.
“The central bank has a tendency to react when locals buy foreign exchange while the lira is weakening,” Demir said by email last week. Still, the move was reason enough for Nomura to take profit on its short lira position versus an equally-weighted basket of euros and dollar last week, when the operations were first announced. In the longer term, Nomura remains bearish, it said, citing the central bank’s “unwillingness to raise real rates sufficiently to contain domestic demand pressures on external balances and compensate for
persistent political risks.”