Turkish lira set for strongest week in 3-1/2 years

Turkish lira set for strongest week in 3-1/2 years
Updated 14 May 2015

Turkish lira set for strongest week in 3-1/2 years

Turkish lira set for strongest week in 3-1/2 years

ISTANBUL: The Turkish lira rallied further, putting it on track for its strongest week in 3-1/2 years as investors bet June elections will see the AK Party retain control of government, but without enough seats to change the constitution.
The lira has fallen more than 10 percent this year, hurt by the resurgent dollar and by deep concerns about the election outcome and political meddling in monetary policy.
It has underperformed most other major emerging market currencies including the South African rand.
Moody’s has warned that the currency’s slide is so severe it could hit bank credit profiles, pushing up the cost of servicing foreign-currency loans.
But the currency has won a reprieve this week as some recent polls suggest the ruling party may win the 276 seats needed to form a single-party government but fall well short of the 367 seats needed to change the constitution and usher in a more presidential system with Tayyip Erdogan at the helm.
Some market participants say returning the ruling party to power without handing Erdogan greater control is their best-case scenario.
“We believe this outperformance is mainly tied to the sell-off in (the) dollar index and no coalition government being priced in after general elections,” Isik Okte, a strategist at TEB Investment, said in a note.
The AK Party is likely to win 290-300 seats in the June 7 polls, Okte said.
Analysts said the rally could continue, as long as poll outcomes remained favorable.
“Decline in uncertainty seems to have been welcomed by the markets. With less than one month to elections, we may see poll results having more market impact than before,” said Ozlem Derici, chief economist at Deniz Invest.
The lira was at 2.5975 to the dollar at 1420 GMT, after touching its firmest point since early April. The currency has rallied more than 3 percent this week, putting it on track for its strongest week since October 2011.
The central bank has been battling the lira’s falls to record lows and stubbornly high inflation for months, but has steered clear of raising rates in the face of political pressure to support a flagging economy ahead of June polls.
It will hold its final policy-setting meeting before elections next week. It left rates on hold at its last meeting but resorted to using more obscure policy tools to help lift the lira.
Separately, Deputy Prime Minister Ali Babacan said on Thursday that public financing must remain tight and a rise in the current-account deficit would be seen as “very negative” when the US Federal Reserve is considering interest-rate hikes.