ISTANBUL: Turkey's lira recovered on Wednesday, helped by a central bank decision not to provide cheap funds to the market in a repo auction and by a lower-than-forecast current account gap, driving confidence the bank is effectively slowing local demand.
By 0913 GMT, the lira strengthened to 1.8083 versus the dollar from a close of 1.8130 on Tuesday when it fell 0.8 percent on the day. Earlier on Wednesday it had firmed as far as 1.8060 right after the announcement that no repo auction would he held, and on the current account data.
Against its euro-dollar basket, the lira firmed to 2.0901, from 2.0931.
Istanbul's main stock index was 0.61 percent down at 59,621 points, slightly underperforming the MSCI emerging markets index which was down 0.31 percent.
The bank's decision not to hold a repo auction was widely expected, particularly as the lira had weakened as far as 2.0980 versus the euro-dollar basket on concerns about Syria on Tuesday, close to the critical level of 2.10, which usually triggers central bank action.
Last month the bank sharply tightened lira liquidity to help to prop up the currency by cancelling for one week its usual daily one-week repo auctions at a cheap rate of 5.75 percent, and replacing these with intra-day auctions selling the lira into the market at much higher rates of above 10 percent.
The bank refers to this move as its "exceptional days" policy. This can also include selling foreign exchange directly to the market or via intraday forex-selling auctions to boost the lira.
"We think the strengthening of the lira is more related to the central bank's return to its 'exceptional days' policy rather than to the current account data," said Isik Okte, a research manager and strategist at Halk Invest.
"The support levels for the dollar-lira rate are 1.8040 and 1.7950 which is the 200-days moving average," Isik added.
DEFICIT CHEER
The lira was also helped by a lower-than-expected current account deficit which showed Turkey's external gap narrowed to $4.22 billion in February from a revised $5.93 billion a month earlier.
"Rising interest rates on bank loans since last October have slowed local demand. This indicates the central bank's policies were effective in narrowing the current account deficit," said Haluk Burumcekci, chief economist at EFG.
Turkey's central bank has long tried to slow Turkey's soaring rate of bank loan growth which last year sent consumer goods flooding into the country, driving up the current account to around 10 percent of gross domestic product.
The central bank has been using a multi-tool monetary policy since late 2010, based on variable daily injections of lira funding, a flexible corridor between lending and borrowing rates and high bank reserve requirements to dampen inflation, rein in growth to more comfortable rates and decrease the current account deficit.
Turkey's two-year benchmark bond yield stood at 9.46 percent, virtually unchanged from a previous close at 9.48 percent.
"The trend of the bond yields remains to the upside in the short term due to tighter liquidity and exceptional days policy. Besides banks wouldn't be eager to buy bonds ahead of next week's debt auctions," said Tufan Comert, a strategist at Garanti Securities.
The Turkish Treasury will hold two debt auctions on April 17 and three debt auctions on April 24, to borrow a total of 11.5 billion lira.
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