Turkish lira weakens nearly 4 percent on week over security concerns

ISTANBUL - Reuters

AFP photo

The lira’s weekly losses against the dollar reached almost 4 percent on July 24 as Turkish air strikes on Islamic State of Syria and the Levant (ISIL) insurgents in Syria and nationwide police raids on militants fuelled investor concerns about Turkey’s security risks.

Fears of a snap election if efforts to form a coalition government fail also weighed on sentiment, with the two-year benchmark bond yield rising above 10 percent for the first time since mid-June.

Central Bank steps to support the lira provided some support to markets. Shares edged higher after sharp losses on July 23.

Turkish warplanes hammered ISIL targets in Syria and police detained hundreds of suspected militants early on July 24, a sign Ankara may have shed its hesitancy in taking a front-line role against jihadist fighters.
Prime Minister Ahmet Davutoğlu told reporters operations against all the militant groups would continue.

“The escalation of geopolitical risks together with the ongoing political uncertainties about the formation of a new government has amplified volatility in the financial markets,” Finansbank economist Deniz Çiçek said in a note.

The lira hit 2.75 against the U.S. currency by 10.28 GMT, marking a 3.6 percent loss on the week, far underperforming the currency’s emerging market peers and the biggest weekly loss since the June 7 election.

The lira rebounded temporarily during the morning after the Central Bank cut its U.S. dollar one-week deposit rate to 3 percent from 3.5 percent and raised the remuneration rate which it pays on forex required reserves to 0.21 percent from 0.15.

Bankers said such measures alone would not be enough to eliminate selling pressure but it was important that the bank showed it was ready to act.

“We do not think that banks will tap that (depo) facility now,” said BGC Partners chief economist Özgür Altuğ, noting that it was last used by banks in late 2012 but saying the rate was starting to normalize.

“Until today the interest rates of this facility were relatively high. Now they started to make some sense,” he said.

The latest Central Bank moves came after it kept key interest rates on hold for a fifth straight month on July 23, avoiding any mention of political uncertainty and focusing on food and energy prices.

Investors were also keeping an eye on coalition talks between Davutoğlu’s Justice and Development Party (AKP) and the main opposition Republican People’s Party (CHP).

The two-year benchmark bond maturing on June 14, 2017 rose as far as 10.05 percent in early trade, its highest since mid-June, compared with Thursday’s spot close of 9.83 percent.

The 10-year benchmark bond maturing on March 12, 2025 rose as high as 9.76 percent from Thursday’s spot close of 9.48 percent.