A cashier counts out 100 denomination Turkish lira banknotes at a currency exchange bureau in Istanbul, Turkey. (Photographer: Kerem Uzel/Bloomberg)

World's Cheapest Currency Lira Has Goldman, BlueBay on Its Side

(Bloomberg) -- If Janet Yellen and friends add any fuel to the rally in emerging-market currencies at Jackson Hole on Friday, the lira could be a big winner.

Turkey’s currency is on course for its seventh monthly gain, and still the likes of Goldman Sachs Group Inc and Societe Generale SA are bullish. That’s because the advances have been limited and the lira remains the worst-performer among major currencies over the last 12 months. It’s also the most undervalued in terms of OECD purchasing power parity, with a real effective exchange rate that BlueBay Asset Management LLP sees as cheap.

“On this measure it is screaming cheapness,” said Timothy Ash, a London-based senior emerging-market strategist at BlueBay, which oversees about $52 billion and holds the Turkish currency and bonds among its portfolios.

The lira’s rally has been constrained by locals buying dollars as President Recep Tayyip Erdogan’s state of emergency drags on and the nation’s companies grapple with vast financing needs, according to Ash. But even before any boost from Yellen and co., momentum may be poised to pick up: the currency broke above a key technical and psychological level at about 3.50 against the dollar this week.

World's Cheapest Currency Lira Has Goldman, BlueBay on Its Side

“Relative to other emerging-market currencies, we continue to strongly favor lira,” said Phoenix Kalen, a strategist at Societe Generale in London, citing the country’s “expectations-defying” economic growth, stimulus measures, and a vigilant central bank. Policy makers’ speeches at the Federal Reserve gathering in Jackson Hole, Wyoming on Friday may also bolster high-yielding currencies such as the lira, she said.

The lira gained 0.1 percent to 3.48 a dollar on Friday, having risen 1.2 percent this year following a 17 percent slide in 2016. Its real effective exchange rate, which dipped to more than two standard deviations below its 10-year rolling average in July, makes it the only cheap currency among regional peers, according to HSBC Holdings Plc.

Lira Assets

Appetite for lira assets remains strong among foreign investors chasing higher returns. The currency is the highest yielding among major liquid emerging markets, and when adjusted for volatility pays almost twice as much as the runner up, the Mexican peso.

Offshore funds bought a net $5.4 billion worth of local currency government bonds this year, the most for the period since 2013. They also bought a net $3 billion of the nation’s stocks, helping fuel a 40 percent rally that pushed the benchmark stock index to a record high.

Expectations that inflation will slow as the central bank holds funding costs at near a six-year high are fueling interest in the nation’s debt and helping the currency too, said Werner Gey van Pittius, the London-based co-head of emerging-market debt at Investec Asset Management Ltd.

“The central bank is doing the right thing,” he said. “We are positive on lira.”

The big hurdle for further gains remains local investors, who have been buying dollars as the lira appreciated and driving their hard currency deposits to a record $165 billion in June. That’s probably because they remain concerned about the greater centralization of power around Erdogan, Ash said.

“There will come a point when the locals just throw in the towel, and have to buy lira,” Ash said, adding that might need the government to relax the state of emergency. “If or when locals turn, and given foreigners are still on the bid, the trade could be powerful, so we might be surprised by how aggressive the rally is.”