Lira Bulls Count on Carry-Trade FOMO to Bring Investors Back

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Spiking U.S. Treasury yields just forced the Turkish currency into the sharpest retreat in emerging markets. With a pivotal interest-rate meeting approaching, lira bulls say that’s a reason for optimism.

The lira is down more than 8% since mid February and money managers like Paul Greer at Fidelity International are sitting tight for Central Bank Governor Naci Agbal to raise rates and stem the decline, boosting the appeal of one the highest-yielding currencies in the developing world.

“As long as the Turkish lira offers a healthy positive ex-ante real policy rate, investors will be attracted by the large nominal carry on offer,” said Greer, who has an overweight stance on the lira. Assuming rates are raised in line with expectations and there’s orderly price action in U.S. Treasuries and emerging markets, “we expect some money to come back into the lira again at current levels,” he said.

Lira Bulls Count on Carry-Trade FOMO to Bring Investors Back

A currency rally that followed President Recep Tayyip Erdogan’s shake-up of his economic team last year hit a wall in mid-February, spurring calls for the central bank to backstop the market with higher rates. With inflation coming in faster than expected last month, Agbal is expected to hike the one-week repo rate 100 basis points to 18% on Thursday.

Since his appointment, Agbal has lifted the headline rate by 675 basis points, delighting investors with a return to more hawkish policy and helping make the lira the best carry-trade currency this year behind the Russian ruble.

Raising rates would give “more evidence that Turkey has changed course and is serious in rebalancing its economy,” said Swedbank’s Hans Gustafson, who sees the lira gaining about 15% to close the year at 6.50 per U.S. dollar.

The lira was trading down 0.1% at 7.5026 against the greenback as of 12:03 p.m. in Istanbul on Wednesday.

Agbal’s arrival at the central bank in November came after Erdogan sacked his predecessor in a revamp that also saw the resignation of Treasury and Finance Minister Berat Albayrak -- the president’s son-in-law. Albayrak had come under fire from opposition parties for mismanaging the economy and the lira roared back almost 25% from its weakest on record as Agbal pledged a return to orthodox policy.

Lira Bulls Count on Carry-Trade FOMO to Bring Investors Back

Henrik Gullberg, macro strategist at Coex Partners Ltd, predicts the Turkish currency will eventually return to levels stronger than 6.9 per dollar and said the spike in U.S. yields that’s hurt risk appetite will pass.

“The rise in real yields in the U.S. is not sustainable,” Gullberg said. “When it comes to an end, the rally in risk sensitive currencies like the lira will resume.”

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