Turkey’s assets rise on surprise ECB rate cut

ISTANBUL - Reuters

Turkey’s 10-year benchmark bond yield fell to 8.74 percent, from 8.91 percent late on Wednesday. The lira sharply strengthened after the ECB announcement.

Turkey’s lira and bonds rose sharply today as a shock rate cut by the European Central Bank (ECB) increased money supply and made Turkish assets more attractive to investors.

In an aggressive response to a slump in inflation way below its target, the ECB reduced its main refinancing rate to a record low of 0.25 percent.

With a lower reward for keeping their money in the euro zone, investors looked for higher yields elsewhere, boosting Turkish bond prices.

The euro fell to a more than seven-week low against the dollar yesterday after the ECB shocked investors by cutting interest rates and said that policy will remain accommodative for as long as necessary.

Turkey’s 10-year benchmark bond yield fell to 8.74 percent, from 8.91 percent late on Wednesday. The lira sharply strengthened to 2.0215 to the dollar, from 2.0315 late on Wednesday, having touched 2.04 - its weakest level since September 30 - before the ECB announcement. By noon it had weakened slightly to 2.0295.

“The ECB’s easing wasn’t fully anticipated by markets, so there has been a knee-jerk positive reaction from high-yielding assets such as Turkish assets on the view that loose developed world liquidity will support prolonged interest in carry trades,” said Manik Narain, head of EMEA strategy at UBS, referring to a strategy in which currencies with lower interest rates are sold in favor of those with higher interest rates.

Eyes on central bank 

“It’s happening at the same time as the Turkish central bank is signaling modestly more hawkish policy settings ahead to support the currency, so the carry appeal specifically for Turkey is seen to have grown,” he added.

Next week, Turkey’s central bank will hold two days of additional monetary tightening, and it increased yesterday the minimum amount of forex it will sell at Monday’s auction to $160 million from the previously announced $140 million.

With the bank so far refusing to raise interest rates, some analysts say its chosen strategy of holding dollar sales and ad-hoc one-week repo cancellations may not be enough to support the lira. Friday’s U.S. non-farm payrolls data is in focus for potential clues to when the Federal Reserve will be winding down its $85 billion-a-month bond-buying program, which is linked to falling unemployment. 

Turkish bonds and the lira have been volatile in recent months on speculation about when the Federal Reserve would start scaling back its stimulus, with Turkey’s large current account deficit making it more vulnerable to expected capital outflows.