Turks Maxed Out on Dollars Help Drive Lira From Zero to Hero

(Bloomberg) -- Once the black sheep of emerging markets, the high-yielding Turkish lira is the only developing-nation currency to rise over the past month, bolstered by a little-noticed yet decisive change in behavior among local investors.

Turks appear to have lost their appetite for foreign tender, removing a key drag on the currency. That’s helped the lira buck the rout plaguing its peers to add more than 4% against the dollar since July 8.

After loading up on more than $35 billion of hard currency in the nine months through early June, and compounding a depreciation earlier this year, net foreign-currency holdings among local investors have remained flat over the summer, according to the latest central bank data. Last week, they sold close to $1 billion dollars worth, the most in more than a month.

The tepid demand is partly the result of a slowdown in the Turkish economy over the past year, which curbed imports and narrowed the nation’s annual current-account deficit to the least in more than 16 years. Despite the latest rally, the currency is still the near the cheapest it’s been since since 2002, according to the lira’s real effective exchange rate.

Now, with Turkey‘s reliance on external funding drastically reduced, inflation slowing sharply, and money chasing the prospect of a pronounced easing cycle globally, the road for gains has been cleared.

In a note to clients on Tuesday, Societe Generale strategist Phoenix Kalen said she expects the “undervalued” currency to advance another 17% to around 4.70 against the dollar. The “improving inflation profile presents Turkish assets with still-attractive real yields despite sharp policy rate cuts,” she said.

Powerful base effects and the currency’s new-found stability should help inflation extend its deceleration, providing a buffer for investors worried that President Recep Tayyip Erdogan’s growing influence over the central bank will make way for a stronger-than-warranted easing.

A 425-basis-point cut to borrowing costs by Turkey’s freshly appointed central bank governor, Murat Uysal, hardly put a dent in the rally. Consumer price growth accelerated to 16.65% in July but remains well below a high of more than 25% in October. Goldman Sachs Group Inc. expects the rate to continue its decline into the single digits in September or October.

The lira gained against the dollar or a third day on Thursday, and was trading 0.1% stronger at a four-month high of 5.4858 as of 2:55 p.m. in Istanbul, holding below key psychological support for the cross at 5.50.

Citigroup strategist Luis Costa recommends investors go long the currency against the euro. “Retail flows may continue to support the lira momentarily,” he said.

To contact the reporter on this story: Constantine Courcoulas in Istanbul at ccourcoulas1@bloomberg.net

To contact the editors responsible for this story: Dana El Baltaji at delbaltaji@bloomberg.net, ;Onur Ant at oant@bloomberg.net, Robert Brand

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