Lira Heads Back Toward Record Low as Verbal Backstop Fades

Lira Heads Back Toward Record Low as Verbal Backstop Fades

  • Lira falls more than 1 percent, leads emerging-market losses
  • Yield on 10-year local currency bond jumps 27 basis points

Turkey’s lira and bonds weakened to approach record lows as the impact of verbal intervention from the central bank began to fade.

The currency got a boost on Wednesday after the monetary authority said it was monitoring “unhealthy price formations in the markets,” and that necessary steps will be taken, fueling speculation the bank was moving closer to taking action to stem a rout. Less than 24 hours later the lira was on the back foot again, falling as much as 1.1 percent.

The lira was 0.8 percent down at 4.4518 per dollar by 10:30 a.m. in Istanbul, leading emerging-market losses. Yields on 10-year government bonds surged 27 basis points to 14.90 percent, near a record high.

“The market needs a trigger to reverse course, and that may not come until the regular monetary policy committee meeting,” said Erkin Isik, a strategist at Turk Ekonomi Bankasi AS.

He said the central bank made a similar announcement on Jan. 10, 2017, 14 days before a regular policy meeting. It then pushed up funding costs by 150 basis points by forcing lenders to borrow from its late-liquidity window, and also hiked rates further in the scheduled meeting.

The central bank’s next policy meeting is on June 7 but some investors say the central bank needs to backstop the lira with higher rates at an earlier emergency meeting as the prospect of higher U.S. rates leaves the nation’s assets unanchored. The currency has weakened more than 14 percent against the dollar this year amid a rout in emerging markets, and further depreciation would put an already-shaky inflation outlook at risk.