Assets continued to be driven higher by a recovery in global risk sentiment after European leaders reached a deal to address the euro zone debt crisis and after data on Thursday showed the US economy grew at its fastest pace in a year in the third quarter.
The lira firmed to 1.7501 against the dollar from a previous interbank close of 1.7620. The lira had strengthened to its highest level in 1-1/2 months at 1.7425 on Thursday after euro zone leaders struck a deal, which boosted global investor appetite for riskier emerging market assets.
“The euro’s strengthening helped the lira to extend its gains. There are no big volumes in the market today,” said one Istanbul banker.
Against a euro-dollar basket, the currency stood at 2.1149 compared with a previous close of 2.1099. On Thursday it had traded as high as 2.0909, its strongest level in a month.
The Turkish central bank injected 25 billion lira ($14.32 billion) into the market in a one-week repo auction on Friday while draining 11 billion lira ($6.3 billion) from the market.
Since last week liquidity has been tightening as the central bank has cut the amount it injects each day at repo auctions. That has pushed the overnight repo rate up by nearly 300 basis points to almost 11.2 percent by Friday, encouraging primary dealers to use the central bank facility rather than buy at high rates in the market.
The central bank said this week it had started tightening monetary policy to support the lira, which it said was undervalued and creating inflation pressure. This month the bank raised the overnight lending rate to 12.5 percent from 9 percent. However, its tightening policy is also balanced by its decision to cut lira reserve requirement ratios (RRRs) from Nov. 11.
Liquidity should ease somewhat when the cut in RRRs comes into effect, said Simon Quijano-Evans, economist at ING Bank in London,.
“If one-week repo rollovers continue through Nov. 11, there will actually be a net increase in lira liquidity of 20 billion lira, implying that the central bank does not want to over-burden the banking sector,” Quijano-Evans wrote in a note.
The yield on Turkey’s benchmark bond maturing on July 17, 2013 stood at 9.76 percent, down from a previous close of 9.90 percent.
“Trade volume was very low on the bond market. There is nothing to say about bonds today. Next week we will monitor inflation data and the borrowing strategy of the Treasury,” said a fixed income trader at a bank in Istanbul.
During intraday trade on Thursday, the benchmark yield fell to as low as 9.71 percent after the central bank said it would lower banks’ required reserve ratios on lira deposits of up to six months’ maturity by nearly 2 percentage points.
The main Istanbul share index closed up 0.75 percent on Friday at 57,042.36 points, underperforming the MSCI emerging markets index which was up 3.48 percent.
