Lira Needs More Than Just the Central Bank as the White Knight

(Bloomberg) -- Turkey’s central bank may have made good on its word to backstop the lira, but any sustained gains in the currency will have to wait.

While the lira rallied about 2 percent on Thursday after policy makers raised the benchmark rate more than anyone expected, a follow-through is unlikely before national elections due in two weeks. Markets haven’t forgotten that President Recep Tayyip Erdogan vowed to take more responsibility for monetary policy if he wins the vote.

“It won’t be all in for investors,” said Petr Krpata, a London-based strategist at ING Groep NV. “There is still a degree of uncertainty about the policy mix.”

The lira has fallen around 15 percent this year. With a one-month forward implied yield of more than 17 percent, it offers by far the juiciest carry among major high-yielding currencies after Argentina’s peso. It could now test 4.40 per dollar, Krpata said.

But the prospect of political deadlock, or even repeat elections if President Recep Tayyip Erdogan’s Justice and Development Party loses control of parliament, remains one of the many risks that investors have to juggle and stands in the way of further gains. What’s even less clear is how any incoming government will deal with Turkey’s deep-seated economic problems.

“We do not expect a meaningful relief rally in FX,” JPMorgan Chase & Co. analysts including Yarkin Cebeci wrote in a note to clients. “The question in the minds of many is whether this is a move to secure lira strength in the run up to the elections (and will be negated either by rate cuts or other measures after the elections) or a determination to restore economic imbalances and to tame inflation for good.”

Turkey’s current-account deficit remains far too wide, inflation expectations are unanchored and the corporate sector is buckling under the weight of foreign-currency debt stock equivalent to around 40 percent of output.

The central bank’s move “will go a long way to restoring investor confidence in Turkey’s ability to stay ahead of the curve,” said Paul Greer, a fund manager at Fidelity International. Ideally, it should be coupled with a commitment to maintain tight fiscal policy, “although this will remain uncertain until after the election results are known,” he said.

©2018 Bloomberg L.P.