Turkey’s financial markets lost momentum on Friday after the U.S. Federal Reserve prompted the biggest daily gains for the lira and Istanbul stocks in more than three years in the previous session.
The Fed’s decision to postpone the scaling back of its economic stimulus gave Turkey some breathing space after months when investors have worried about how the country will finance its large current account deficit once the cheap Fed money which has bolstered its capital markets is withdrawn.
Economists still say the Fed will begin to reel in the huge flows of cash it is pumping into markets before the end of this year, however.
‘With Fed tapering back in the headlines towards year-end, the pressure on the lira will return. The large current account deficit makes the lira vulnerable to declining global liquidity,’ Nordea Bank analysts said in a note.
The lira, which gained as much as 3 percent during the day on Thursday, weakened to 1.9759 against the dollar by 1434 GMT.
Banks led the retreat of Istanbul’s main share index , down 2.02 percent to 77,862.93, having closed up 6.26 percent on Thursday - the biggest daily gain since mid 2010.
The 10-year benchmark yield rose to 8.92 from 8.69 percent close on Thursday.
Turkish Finance Minister Mehmet Simsek told Reuters on Thursday that relief from the Fed’s surprise delay would only be temporary and that Turkey must push on with plans to rebalance its economy.
The risks from the current account deficit are compounded by high levels of short-term debt and comparatively low forex reserves.
Turkey’s central bank on Friday opened a one-week, fixed-rate repo auction with a volume of 8 billion lira ($4 billion) as well as a one-month repo auction with a volume of 5 billion lira.
($1 = 1.9605 Turkish liras)