ISTANBUL: The Turkish lira weakened slightly on Tuesday after the Treasury raised less than expected at an auction of five-year bonds and as high oil prices continued to weigh on the outlook for Turkey's energy-importing economy.
At 1538 GMT, the lira traded at 1.7937 against the dollar, slightly weaker than 1.7950 late on Monday. However, it held above Monday's intraday low of 1.80, its weakest since Jan. 26 after data showed Turkey's current account deficit was bigger than expected in January.
The country's large current account deficit is a key source of concern for investors and continued to weigh on the lira on Tuesday as Monday's data underscored the impact of high oil prices on the economy which depends on imported energy.
The Treasury sold a five-year, fixed-coupon bond at an auction on Tuesday at a yield of 9.56 percent, below a forecast of 9.62 percent. The sale totalled 1.19 billion lira, amounting to 2.07 billion lira ($1.15 billion) including sales agreed before the auction, below the Treasury's target of 2.3 billion lira.
"The Treasury had two options, either it would borrow the amount it had announced and boost interest rates or it would borrow a little less and prevent rates from increasing," said a senior bank treasury official.
The fact that it borrowed less suggested it is reluctant to let rates rise, adding pressure on the lira.
The lira has weakened by around 2.5 percent against the dollar since the central bank cut its overnight lending rate on Feb. 21 to cushion a slowing economy, while bonds have been hit by concerns about inflation pressure .
Against a euro-dollar basket, the lira firmed to 2.0723, from 2.0756 on Monday, but the move was seen as insignificant, traders said.
Traders have said that if the lira weakens beyond 2.10 versus the euro-dollar basket, the central bank would probably take steps to support the currency.
"The correction in the current account deficit is very slow. This is keeping the lira weak, relatively. Our daily target range for the lira can be 1.7820-1.7950," said HSBC strategist Fatih Keresteci, forecasting flat bond trade.
Turkey's central bank has been working hard to rebalance an economy which surged to double-digit rates of growth at the beginning of last year as imports surged. High oil prices add to the risk of inflation overshooting, which would force the central bank to keep monetary policy tight.
"With Brent oil prices hovering around $126 per barrel and the current account deficit (CAD) not improving as expected, the outlook on the CAD front seems rather bleak," said Tera Brokers in a daily note.
Otherwise, domestic factors were taking a backseat to the US Federal Reserve's policy statement later on Tuesday, which will be closely watched after Friday's data showed an encouraging gain of more than 200,000 jobs in February. Signs the US economy is strengthening is boosting risk appetite and spurring demand for emerging market assets.
"I think the Fed optimism which is prevalent in global financial markets in today's transactions will have something of a positive impact on Turkey," said Keresteci.
Turkey's two-year March 5, 2014 benchmark bond yield stood at 9.29 percent, virtually unchanged from late on Monday.
The central bank reduced its repo funding amount on Tuesday to 4 billion lira against a 6 billion lira redemption.
TEB-BNP Paribas strategist Erkin Isik forecast a reduction in repo funding "as public sector wage payments will increase banking sector liquidity today and tomorrow."
Istanbul's main stock index rose 0.6 percent to 59,389.02 points, underperforming a 1.2 percent gain in the MSCI emerging markets index.
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