Turkish lira back in favour as economy improves
What a difference a few months makes.
After dropping to an all-time low amid economic worries, terrorist threats and political worries at the start of the year, recent stability and signs of an economic improvement have seen it reverse all of its losses for the year.
Now, with its emerging markets peers facing political tensions and macroeconomic issues of their own, Turkey is becoming the favoured spot for yield-hungry traders looking to take advantage of its high interest rates.
Although the Lira is still one of the worst-performing EM currencies for 2017 so far, it has strengthened more than five per cent since April’s constitutional referendum.
Although the country still faces serious challenges, both political and economic, the outlook has been improving. Economic growth in the first quarter comfortably beat forecasts, confidence has picked up to its strongest level in 18 months, and inflation has started to come down from the eight-year high it hit earlier in the year.
Turkey’s central bank began tightening policy last year in a bid to stop lira weakness from driving up import costs and, though it isn’t expected to hike rates any further, any cuts are expected to be gradual.
Compared to the record low interest rates on offer in much of the rest of Europe, therefore, Turkey’s benchmark rate of 8 per cent has made it an increasingly attractive destination for the carry trade – when investors borrow money where rates are low to fund investments in countries with higher returns.
Analysts at ING noted this morning:
Investors are faced with a choice of in which high yielders to invest. The roublr had ben popular, but now faces challenges with low oil prices and potentially broadening US sanctions. The Rand looks to be trading on ice and could easily hand back its gains quickly. In the Europe, Middle East and Africa space, our preference for carry would be lira. We expect the CBT to be slow in cutting rates, meaning effective funding rates may stay near 12 per cent.
Source: Financial Times.com