Strong Turkish Growth Alone Not Enough to Extend Lira's Rally
(Bloomberg) -- Turkey’s growth outlook is improving markedly but the onus to keep a rally in the nation’s assets going still rests firmly with the central bank, according to Quaestio Capital Management SpA.
The lira climbed to a nine-month high against the dollar and bonds advanced after Monday’s data showed the economy expanded at a peer-beating 5.1 percent pace in the second quarter. With leading indicators such as industrial production and consumer confidence suggesting the momentum is going to carry into the second half, focus is now turning to the monetary authority’s policy statement on Sept. 14 to see whether gains are sustainable.
The central bank needs to “continue to demonstrate its ability to maintain a hawkish bias” for investor perception to remain positive, said Lorenzo Gallenga, the Milan-based head of global macro and emerging markets at Quaestio, which oversees about 13 billion euros ($15.6 billion) globally, said Friday. Gallenga has switched his exposure in the nation’s bonds from “a strongly underweight” position to a “slightly overweight” one over recent months. “We saw from inflation data how tight the market is,” he said.
While the economy expanded for a third straight quarter, last week’s data showed that annual consumer-price growth halted a three-month decline in August and core inflation accelerated to more than 10 percent for the first time since 2005. JPMorgan Chase & Co. pushed back expectations on the timing of any Turkish monetary loosening for at least a third time last week, saying it now sees the central bank holding rates steady through March.
Turkey’s tight monetary policy has made its currency and bonds among the most attractive for carry traders in emerging markets.
While “there’s no question” that strong growth numbers will reinforce the appetite for lira assets in the short term, “unless inflation is fixed” the lira weaken, according to Cristian Maggio, head of research at TD Securities in London. “There’s no escape from this simple reality.” Maggio said that measures such as the Taylor rule suggested interest rates need to be as high as 16 percent.
The lira gained as much 0.5 percent Monday to 3.3953 per dollar, its strongest level since December, leading gains across emerging markets. The yield on Turkey’s 10-year bonds held unchanged to 10.64 percent, down from a record-high 11.98 percent in January.
The central bank has held its weighted average cost of funding at close to 12 percent since mid-May. Still, inflation expectations over the same period have remained stubbornly high. A central bank survey of analysts and businesses shows inflation forecasts over the next 24 months at around 8 percent, compared with policy makers’ official target of 5 percent.
Quaestio’s Gallenga says Turkish monetary policy is adequately tight and consumer prices will moderate in the coming months. “I don’t believe the central bank should consider cutting rates before mid-2018, perhaps later,” he said. It needs to “remain cautious until inflation is clearly coming down.”