Turkish Lira Falls to Record Lows Before New Stimulus

(Bloomberg) -- Turkey’s lira fell to new record lows against the dollar and euro as investor concerns about an overheating economy and unresponsive central bank mounted.

The currency fell past 5 per euro and 4.07 a dollar as of 1:04 p.m. in Istanbul. It’s down about 9 percent against the euro this year, the worst performance in emerging markets behind Argentina’s peso. Investors have called for higher interest rates to moderate an economy they say is overheating, but Turkey’s responded instead with stimulus measures aimed at boosting growth.

“This mismanagement of the currency leads to a loss of confidence in the purchasing power of the lira which is hard to cure,” said Lutz Roehmeyer, chief investment officer at Capitulum Asset Management in Berlin. “Only massive one-off hikes can heal this situation, which is of course not popular as it slows the economy."

President Recep Tayyip Erdogan will announce later Monday details of a package of investment incentives aimed at supercharging growth and investors will be trying to determine its potential impact on inflation, which held in the double digits for an eighth month running in March.

JPMorgan Chase & Co. said it remains underweight Turkey’s currency and bonds, citing a current-account deficit that the bank sees widening to 6 percent of output in 2018 and a deteriorating inflation outlook. The nation needs a “sizable” foreign-exchange adjustment and credible policy response, which may not be “imminent,” the bank said in a note published April 6.

“There isn’t much use, from a disinflation perspective, if any tightening by the central bank will lead the government to become even more aggressive via fiscal measures,” Kaan Nazli, a strategist at Neuberger Berman Group, said by email.

Turkish bonds fell, pushing the yield on benchmark 10-year notes 8 basis points higher to 13.15 percent, close to a record high touched last week. The central bank, which said in March that it would deliver extra monetary tightening if needed, meets to review policy on April 25.

While there is a good argument in favor of monetary tightening, “I am just not convinced things are deteriorating enough at the margin for the central bank to see it like that,” said Manik Narain, a strategist at UBS Group AG.

(Corrects story to show Roehmeyer is chief investment officer at Capitulum Asset Management.)

To contact the reporters on this story: Benjamin Harvey in Istanbul at bharvey11@bloomberg.net, Constantine Courcoulas in Istanbul at ccourcoulas1@bloomberg.net.

To contact the editors responsible for this story: Benjamin Harvey at bharvey11@bloomberg.net, Taylan Bilgic, Anil Varma

©2018 Bloomberg L.P.