Lira Plunges to Records as Asia Traders Sell on Trade Fears

(Bloomberg) -- Turkey’s lira weakened to a record low Friday as investor concern mounts that U.S. President Donald Trump is taking steps to initiate a global trade war.

The currency tumbled past 4 per dollar for the first time, falling to as low as 4.0361 before trading 0.7 percent lower at 3.9614 at 12:30 p.m. in Istanbul. It plunged as much as 3 percent against the yen and also hit a new record 4.9778 against the euro. The drop during Asian trading hours was probably due to stop-loss orders from Japanese retail investors holding lira trades against the yen, said Koji Fukaya, chief executive officer at FPG Securities in Tokyo.

Trump’s decision to impose tariffs on China and Chinese plans for reciprocal action have fueled concerns about trade wars that could impede global growth. His nomination for national security adviser of John Bolton, known for his hawkish views, added to worries of increased geopolitical tensions, hurting demand for risky assets. Turkey’s growing reliance on foreign capital inflows makes the lira sensitive to changes in risk sentiment.

The Goldilocks scenario for emerging markets of synchronized global growth is under serious threat from Trump’s protectionist policies, according to Piotr Matys, an emerging markets currency strategist at Rabobank in London. “Escalated risk aversion is likely to further undermine already weak market sentiment toward the Turkish lira.”

For Turkish President Recep Tayyip Erdogan’s senior adviser Cemil Ertem, the lira’s slump past 4 per dollar has “no importance” as it’s due to quotations entered when the market is shallow and the weakening is “not compatible with Turkey’s fundamentals.”

Rate Hike Expectations

Turkey’s central bank is unlikely to intervene for a while longer, according to William Jackson, senior emerging-market economist at Capital Economics in London.

“Lira weakening to 4 per dollar probably wouldn’t be enough to prompt tightening, but if the lira reached about 4.25 per dollar that would, on past form, point to interest-rate hikes,” Jackson said in an emailed report on Thursday. Over the past six years, currency depreciation of about 10 percent over a three-month period has typically been followed by significant monetary tightening in Turkey, he said.

The implied yield for three-month dollar-lira currency forward contracts jumped to 13.13 percent after touching an intraday high of 13.27 percent earlier on Friday, indicating markets expect Turkey’s central bank to hike the key funding rate by as much as 50 basis points from a current level of 12.75 percent.

The yield on Turkey’s two-year notes rose 15 basis points to 14.06 percent, while the yield on 10-year bonds jumped by 25 basis points to 12.74 percent.

“Looking at the way the short end of the bond market has behaved over the past week or two, with the two-year yields up above 14 percent, the financial market believes that the next rate move will be up,” Nigel Rendell, a senior analyst at Medley Global Advisors in London, said by email. “Not that the Turkish central bank will want to raise rates anytime soon. Given the global uncertainties -- risk of a trade war etc -- the lira therefore becomes the swing variable, reflecting the negative effects of Turkey’s high inflation.”

--With assistance from Yumi Teso

To contact the reporters on this story: Tugce Ozsoy in Istanbul at tozsoy1@bloomberg.net, Fercan Yalinkilic in Istanbul at fyalinkilic@bloomberg.net.

To contact the editors responsible for this story: Celeste Perri at cperri@bloomberg.net, Benjamin Harvey, Neil Chatterjee

©2018 Bloomberg L.P.