Lira reverses gains after Turkey extends state of emergency

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It was all looking (relatively) clam for the lira.

Having finished February as one of the world’s best-performing emerging market currencies, Turkey’s lira has suffered a fresh blow in recent days, reversing all of its gains from that month.

The currency has dropped as much as 0.3 per cent against the dollar today to TRY 3.7695 – its weakest level since February 1 and taking a fresh leg lower today after the country’s prime minister announced an extension of a state of emergency that has been place since a failed July coup.

“The state of emergency will continue for a while”, Binali Yildrim said in Ankara this morning.

“It is extended every three months….that three month period will expire on April 20, and at this time it will be extended, but it will not continue forever”, said the Turkish prime minister.

The lira has now resumed its position as the world’s worst performing major EM currency, losing per cent 6 per cent against the greenback in 2017.

Turkey’s exchange rate has been rocked by the country’s political upheaval (Turks will vote on a major transfer of power to the office of the president in April), a slowing economy and an inflation rate of over 10 per cent.

Still, bullish analysts at ING think the “grossly undervalued” lira is due for a rebound, penciling in another interest rate rise from the central bank later this month.

“Pro-active, inflation-orientated hikes in an environment where the lira has been showing signs of stability should improve investors’ perceptions of the central bank’s credibility and help the lira”, said Petr Krpata, FX strategist at ING.

The central meets again in a week. Policymakers have been engaged in a series of unorthodox moves to help prop up the currency, including shifting reserve requirements for banks and hiking its overnight lending rate.

Kubilay Ozturk at Deutsche Bank thinks that in the face of spiralling inflation and a falling currency, the central bank will tighten its average funding rate by 150 basis points “in the months ahead”.

Still, he warns: “Whether the bank’s response will prove adequate to safeguard price stability, however, is a moot question”.

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