Turkish lira strengthens, bond yields fall

The Turkish lira strengthened and bond yields fell on Wednesday, a day after the treasury held three successful debt auctions and as investors awaited the central bank’s quarterly inflation report on Thursday for signs of a more hawkish policy. Shares traded stronger than the emerging markets index as higher than expected corporate results abroad underpinned investors’ appetite for riskier assets. The lira had firmed to 1.7760 versus the dollar, compared with 1.7821 late on Tuesday. Against a euro-dollar basket, the lira traded at 2.0610, stronger than 2.0677. “The prospects that the central bank will announce on Thursday further monetary tightening and new adjustments in the liquidity management are supporting the lira,” said a forex trader. The Turkish Central Bank will announce its quarterly inflation report on Thursday. Central Bank Governor Erdem Basci said on April 21 the bank would prefer to change its policy stance rather than revise its inflation forecast of 5 per cent, underlining the hawkish tone the bank has adopted since its March meeting. The bank operates a complex policy mix of daily liquidity injections, a low policy rate and an interest rate corridor -an adjustable gap between its overnight borrowing and lending rates. It also provides smaller amounts of lira at more costly rates when the lira comes under pressure. “The focal point of CEEMEA markets for the rest of the week will be Turkish Central Bank’s inflation report, which is likely to show CPI growth should start declining as early as May but to reach the 5 per cent target only in mid-2013,” wrote analysts at BNP Paribas. “The central bank has been providing just enough lira liquidity at the repo auctions to bring down the average funding cost close to 8 per cent. However, this generous liquidity is likely to persist only as long as the lira appreciates so that their inflation fighting efforts are not undermined,” analysts said. Turkish consumer prices rose 10.43 per cent in March, more than double the central bank’s year-end target of 5 per cent. Investors were also awaiting a speech from Basci at 1030 GMT on Wednesday. “The dollar-lira rate indicates a technical downside trend. We think the first important level will be 1.7750. If the lira firms below this level, it can technically strengthen further towards 1.75,” said Fatih Keresteci, a strategist at HSBC.