August 15, 2011
Lira Strengthens After Central Bank Says Currency Undervalued
Turkey’s lira climbed against the dollar after central bank Governor Erdem Basci said the currency was undervalued and a rapid solution to Europe’s debt problems may drive the lira higher.
The lira strengthened as much as 0.9 percent after Basci’s comments and traded 0.5 percent stronger at 1.7692 per dollar by 5:12 p.m. in Istanbul, gaining for a second day and trimming this month’s loss to 4.6 percent. The currency headed for its strongest close in almost a week.
The lira is about 5 percent or 10 percent undervalued against the equally weighted dollar and euro basket and may appreciate should there be a rapid solution to the European debt crisis, Basci said in a televised interview with CNN Turk news channel today.
The central bank “thinks that demand for the Turkish lira will increase because of monetary easing abroad and the Federal Reserve will have to resort to that too,” Tufan Comert, a strategist at Garanti Securities, wrote in a note to clients. Basci’s comments indicate that the lira should trade between 1.60 and 1.68 per dollar, Comert said. The currency last traded near this range in July.
The Turkish central bank sold $100 million in an auction today, equaling the highest amount it has offered since starting the daily currency sales on Aug. 5 in an effort to curb recent declines in the lira a day after it cut interest rates to a record low of 5.75 percent. Its dollar sales totaled $490 million since Aug. 5.
Growth Versus Lira
The bank reduced the benchmark one-week repo rate to 5.75 percent from 6.25 percent at an emergency meeting on Aug. 4, saying the measure was designed to limit the impact of the European crisis on Turkish growth.
“By pre-emptively cutting the one-week repo rate by 50 basis points, the Turkish central bank made clear that its focus was growth, not the Turkish lira,” Thomas Costerg, an economist at Standard Chartered Bank Plc in London, wrote in e-mailed comments.
The Turkish central bank seems to be “backpedaling” by increasing its foreign-currency auctions, Costerg said. “However, it is likely that investors will remain focused on the ‘original sin’ of the rate cut, which has led to an irremediable correlation of the lira to the euro-area debt problems.”
The lira has lost 8.3 percent to the dollar in the second half to date, making it the worst-performing currency worldwide, as worries about a record-high current-account deficit weighed on investor sentiments towards Turkey.
“The issue is that the euro-area problems are unlikely to dissipate in the short term, and the lira may well remain under pressure as a result,” said Costerg.
Benchmark two-year bond yields decreased three basis points, or 0.03 percentage point, to 8.11 percent, according to a Turk Ekonomi Bankasi local bond index.
http://www.bloomberg.com/news/2011-08-15/lira-gains-2nd-day-on-possible-steps-to-resolve-eu-debt-crisis.html
