Lira Drops as Global Risk Aversion Trumps Shift in Rate Regime

(Bloomberg) -- Turkey’s lira declined as global risk aversion spurred by Italy’s political woes outweighed optimism over the central bank’s plan to simplify interest-rate regime.

The currency lost as much as 1.1 percent, reversing an advance of as much as 0.6 percent against the dollar. While the currency’s one-month implied volatility fell for a fourth day, it’s still the highest in the world.

The lira is on course for its worst month since 2008 as concern over the nation’s current-account deficit and double-digit inflation put the nation’s assets at the center of an emerging-market selloff. It climbed the most in more than two years on Monday after the monetary authority said that, starting on June 1, its benchmark will be the one-week repurchase rate, which it hadn’t used as its main funding tool since January 2017.

The return to a simple interest-rate corridor is “important at a time when the market is questioning the independence of the central bank and the willingness of political authorities to implement a standard monetary policy,” Goldman Sachs economists including Clemens Grafe said in a report dated May 28. “The interest-rate corridor does allow the central bank some flexibility in using liquidity management to affect rates when needed.”

But optimism over a less complicated rates regime was short-lived as the dollar extended its gain to a third day, dragging every emerging-market currency down. The Bloomberg Dollar Spot Index is heading for the highest close since November, as chaos in Italy and other parts of the euro region highlighted the possible return of political risk.

The lira declined 0.9 percent to 4.6260 per dollar as of 2:14 p.m. in Istanbul. The currency’s implied volatility dropped to 25 percent. Borsa Istanbul 100 Index declined 1.8 percent and the yield on 10-year bonds rose two basis points to 14.16 percent.

©2018 Bloomberg L.P.