Turkish lira to drop further, Italy’s UniCredit says

Bloomberg

refid:10778761 ilişkili resim dosyası

As the Turkish Lira loses value against the U.S. dollar, largely on expectations of a hefty interest rate cut by the Central Bank today, an Italian bank recommended selling the currency to investors, signaling further erosion.

UniCredit recommended investors sell the lira against the dollar on concern the economy will shrink and political tensions increase.

The U.S. dollar gained more than 3.3 percent against the lira since the start of the year, and was trading at around 1.59 liras at noon yesterday. The greenback gained more than 35 percent against the lira since the start of 2008.

Political tensions resurfaced between the government and army after the arrest of more suspected coup-plotters last week. An economic report showed a drop in capacity utilization in November, suggesting the slowdown is worsening.

"We recommend selling the lira against the dollar," said Martin Blum, head of emerging-markets strategy in Vienna at UniCredit MIB, part of Italy’s largest bank by assets UniCredit. "Our interim target is 1.70, with potential for new highs of 1.80 thereafter."

The Turkish economy will shrink this year, offsetting the positive impact of the shrinking current-account deficit on the currency, Blum said. The shortfall was the smallest in three years in November as falling energy prices and slumping demand helped reduce imports.

A regional trend
"Our fundamental view remains for weaker regional currencies despite improving current-account deficits," Blum said. The currency may also decline because the central bank will probably cut interest rates by at least 1 percentage point today, Blum said.

Investors have sold emerging-market assets on concern the global credit financial crisis will worsen. The Ankara-based Central Bank will lower its main interest rate by 75 basis points this week, according to a median forecast of 20 economists surveyed by Bloomberg News. The rate is currently at 15 percent after the bank cut it by 1.25 percentage points last month in a bid to avert a recession.

"There is a risk [the Central Bank will cut] 100 basis points, with the market still viewing the central bank as trying to counter the severe economic slowdown," Simon Smollett, senior options strategist at Calyon in London, wrote in a client note yesterday.