Dollar, politics, push Turkish lira one percent lower

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London | March 02, 2017 5:22 PM

The Turkish lira fell more than 1 percent on Thursday, underperforming emerging market peers on back of dollar strength, Syria-related security worries and fears of more discord between the government and media.

The Turkish lira fell more than 1 percent on Thursday, under-performing emerging market peers on back of dollar strength, Syria-related security worries and fears of more discord between the government and media. (Reuters)

The Turkish lira fell more than 1 percent on Thursday, under-performing emerging market peers on back of dollar strength, Syria-related security worries and fears of more discord between the government and media. Wall Street gains overnight briefly lifted MSCI’s emerging markets index towards one-week highs. The lira hit its weakest since Feb. 15 after the dollar firmed to seven-week highs. Investors eyed a U.S. Federal Reserve rate rise in March after Governor Lael Brainard, who is usually perceived as dovish, said it could be “appropriate soon” to remove “additional accommodation”. “Given the sizeable current account deficit, Turkey is vulnerable to a stronger dollar and tighter monetary policy in the U.S. – they have sizeable dollar debt and that is unnerving investors,” said Jakob Christensen, head of emerging markets research at Danske Bank. But politics also weighed, as the Turkish army and allied Syrian rebels attacked villages held by U.S.-allied militias in northern Syria on Wednesday, an escalation of Turkey’s military campaign there.

Domestic risks are also on the rise as an April 16 referendum approaches. President Tayyip Erdogan strongly criticised national daily Hurriyet this week, sending its shares and those of its parent company tumbling. Hurriyet and Dogus shares rebounded on Thursday by as much as 4.5 percent after the paper said it had appointed a new editor-in-chief. “Consensus is Erdogan wins (the referendum) and … markets stabilise thereafter as the regime looks to get back to business as usual,” said BlueBay strategist Tim Ash, who suggested however that investors could “take money off the table in the run up to the vote.”

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Turkish five-year credit default swaps were trading at 244 basis points, according to Markit data, hovering near a two-week high hit on Wednesday.
Other emerging currencies also slipped, with the South African rand down 0.8 percent, the Russian rouble down 0.4 percent, and the Mexican peso down 0.6 percent. The Kazakhstan tenge weakened 0.5 percent, also pressured by oil prices dipping back towards $56 a barrel. But Ukraine’s hryvnia bucked the trend, firming 0.5 percent against the dollar ahead of a central bank rate setting meeting today. Equities were weighed down by Hong Kong though most other bourses rose, including Turkey, which hit two-year highs. Indonesian stocks rose 1.1 percent to 3-1/2 month highs and Korean stocks closed up 0.5 percent at one-week highs after robust factory and trade data.

“The very strong (global manufaturing) numbers we got yesterday underscored the global synchronised recovery we are seeing right now,” said Christensen. “EM exporting countries are benefiting from that, companies will see higher earnings.” Overseas investors increased their buying of emerging markets debt and equities to an estimated $17.1 billion in February, data from the Institute for International Finance showed, buoyed by positive political and economic news. Average yield spreads on emerging market sovereign bonds over U.S. Treasuries have narrowed 36 basis points (bps) this year to 304 bps, the lowest since November 2014.

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