Currency extends second-worst performance among peers in 2015; worsening political situation in Turkey seen persisting

Bloomberg
Istanbul


The lira capped its longest stretch of weekly losses in 16 years as mounting political turmoil in Turkey compounded the nation’s worsening security situation before general elections in November.
The currency fell 1% to 3.0517 against the dollar as of 5.44pm in Istanbul on Friday after sinking to a record low 3.0615 on Thursday, taking the loss this week to 1.5%.
The lira, which had its eighth week of declines, is the second-worst performer among 24 emerging-market peers this year after the Brazilian real with a depreciation of 23%.
Escalating tension between the government and Turkey’s Kurdish population in the run-up to the second round of elections in six months has dragged the lira to oversold levels this month, indicating to some analysts that the selloff may be exaggerated. The prospect of a Federal Reserve rate increase has also damped appetite for riskier assets, with foreign investors pulling a record $6.88bn from Turkish stocks and bonds so far this year.
“Concerns about Turkish politics are unlikely to diminish ahead of early general elections and will limit scope for the lira to trim its losses,” Piotr Matys, a London-based foreign-exchange strategist at Rabobank, who expects the Fed to keep rates unchanged this week, said by e-mail. The currency will probably not hold above the 3-per-dollar threshold and may see a “short-term correction from oversold levels,” he said.
The lira’s 14-day relative-strength index has traded below 30 every day this month, indicating the currency may be poised for a rebound. Yields on the nation’s two-year debt added one basis point to 11.29% on Friday, taking increases this week to 11 basis points.
Turkey’s Prime Minister Ahmet Davutoglu has said a major ground offensive against Kurdish militants in northern Iraq is possible as Turkish warplanes struck rebel bases across the border for the second day.
The benchmark Borsa Istanbul 100 Index decreased 0.7% on Friday, ending the week at the lowest level since the gauge entered bear-market territory on August 24, having lost 20% from a peak in the past year.
The lira is expected to end the year at 2.92 per dollar, compared with 2.75 three months ago, the median estimate of 39 analysts on Bloomberg shows. That implies a gain of about 3.9% from current levels.