ISTANBUL: The Turkish lira recovered from overnight losses on Wednesday and bonds held at high levels, with investors positioning for a possible cut in secondary interest rates by the central bank.
Economists believe the bank may narrow the interest rate corridor the difference between its 5 percent overnight borrowing rate and its 11.5 percent lending rate when it meets on Thursday.
That expectation kept downward pressure on bond yields, with the benchmark bond due March 5, 2014 steady at 7.89 percent.
"Bond yields resumed declining as foreign demand continues, a more dovish stance by the Central Bank, even if it decides not to cut rates, may push yields as low as 7.70 percent," Garanti Yatirim strategist Tufan Comert said.
"We think that a reserve requirement adjustment is certain (on Thursday). Among the easing options we find a 50 basis points cut at the upper end of the interest rate corridor more likely," said Ozgur Altug, chief economist at BGC Partners.
Trade in the lira was also influenced by Federal Reserve Chairman Ben Bernanke's overnight testimony to Congress, which offered few clues on whether the US central bank was moving closer to a fresh round of monetary stimulus.
The currency traded close to Tuesday's levels against the dollar after dipping following Bernanke's comments, firming to 1.8070 by 0755 GMT from 1.8126 earlier.
Against its euro-dollar basket the lira was little changed at 2.0130. "Global factors are weighing more dominantly on lira sentiment. It seems the lira is balanced between optimism in global markets and rate cut expectations in Turkey. I expect lira to move around 2.00 against the euro/dollar basket, and 1.7950-1.80 against the dollar in the short term," he added.
Expectations of monetary policy easing were fuelled earlier this month by central bank Governor Erdem Basci, who said the bank may cut its year-end 6.5 percent inflation forecast in July.
"If the (central bank) does not cut tomorrow, it might create a greater opportunity to buy Turkish government bonds after the short "disappointment sell-off" as the decision would mean a very strong commitment to the fight against inflation," Altug of BGC Partners added.
The bank is not expected to cut its main policy rate, the one-week repo rate, from its record low of 5.75 percent.
It injected 1.5 billion lira ($831 million) into the market in a one-week repo auction on Tuesday, after injecting a combined 5.5 billion lira injection on Monday and Tuesday.
Istanbul's main share index traded 0.54 percent higher at 62,839.41 points, outperforming a 0.35 percent decline in the MSCI emerging markets index.
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