Turkish lira weakens to record lows, bond yields rise

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Turkey’s lira sank to fresh record lows against the dollar and euro on Wednesday as investor concerns deepened about the outlook for monetary policy and inflation - and about political tension in Russia and Syria.

The lira, one of the worst-performing emerging market currencies this year, has plumbed record lows for the last five trading days. It has been pressured by a sharp sell-off in Russia’s rouble, the currency of a major trading partner and a fellow emerging market heavyweight.

It hit an all-time low of 4.1550 against the dollar, a depreciation of 8.5 percent this year, weakening from 4.1166 a day earlier. Against the euro, it weakened to a record low of 5.1435.

While Russian assets have been hit by US sanctions on Russian businessmen, investors said many of Turkey’s problems were homegrown. They pointed to concerns that President Tayyip Erdogan, who wants to see borrowing costs lowered, has excessive influence on monetary policy.

There was little impact from closely watched current account data, which showed a deficit of $4.152 billion (£2.9 billion) in February, less than the $4.2 billion forecast in a Reuters poll and down from a deficit of $7.039 billion a month earlier.

However, the deficit was sharply wider than the $2.566 billion in February last year and one analyst said it affirmed Turkey’s vulnerabilities on the balance of payments front.

“(It) underlines the challenges for the CBRT (Turkish Central Bank) in managing the lira when Erdogan has tied both hands behind its back in terms of limiting its ability to hike policy rates,” said Timothy Ash, a strategist at Bluebay Asset Management.

The Turkish Central Bank holds its next rate-setting meeting on April 25.

The cost of insuring Turkish debt spiked to a 4-1/2 month high, while dollar bonds fell across the curve.

Turkish five-year credit default swaps rose to 215 basis points (bps) according to data from IHS Markit, the highest level since mid-November, and up 6 bps from Tuesday’s close.

The May 2040 Eurobond was down 0.36 cents to 100.9 cents, and the January 2041 issue down 0.34 cents to 92.4 cents according to Tradeweb. Both were trading at lows not seen since January 2017.

The yield on the benchmark 10-year bond opened at 13.5 percent, compared with a last level of 13.41 percent in value-dated trade a day earlier.

The main BIST 100 share index edged up 0.35 percent, having fallen 2.16 percent on Tuesday.