ISTANBUL: Turkey's lira weakened on Tuesday as some traders positioned for the outside chance of an interest rate cut at a central bank meeting on Thursday, although the market consensus was still for no change in rates.
Analysts looked to Treasury auctions later in the day to gauge the level of demand for local assets in the run-up to the central bank meeting.
Turkey's treasury was due to hold three bond auctions on Tuesday, including the tap of its fixed-coupon 2-year and 5-year bonds, as well as a 10-year CPI-index bond.
"Bids at Treasury auctions today will be important in shaping the expectations over the demand conditions for the upcoming issuances in the following three weeks as well," TEB-BNP Paribas said in a note.
The lira slipped to 2.1010 against the dollar by 0823 GMT, compared with 2.0850 late on Friday. Financial markets were closed on Monday for a public holiday.
In a Reuters poll, 11 out of 13 banks expect no policy rate cut at the central bank meeting on Thursday, but two respondents said they expected a cut.
Analysts said that without a rate cut to support economic growth, Turkish assets may not be able to extend their recent rally.
"Recent expectations that the European Central Bank may cut rates and the Fed will remain dovish have made emerging markets more attractive, particularly Turkish assets because of the high interest rate," said Erkan Dernek, market strategist at Odeabank.
"So Turkey has rallied to the peaks observed prior to (Federal Reserve) tapering. But now in order to rally one step further, there needs to be a cut in interest rates to support Turkey's growth story, but this would only be sustainable if global rate pressure remains low."
Analysts also looked to global liquidity conditions for clues on the outlook. Turkey is especially vulnerable to global liquidity tightening as it depends on cheap capital inflows to finance its large current account deficit.
The market will be scrutinising minutes of the Federal Reserve's last policy meeting, due out on Wednesday, for clues on the timing of a rate hike.
On Monday, Dallas Federal Reserve President Richard Fisher and San Francisco Fed President John Williams both reinforced market expectations that the U.S. central bank is in no hurry to hike interest rates, saying low inflation was more of a risk than high inflation.
The Istanbul stock market was up 0.28 percent at 75,219.22, outperforming the broader emerging markets index , which was down 0.21 percent.
There were no trades yet in Turkey's 10-year benchmark bond .
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