Turkish lira gains, shrugs off generals quitting

ISTANBUL: The Turkish lira rallied on Monday as investors shrugged off the resignation of the country's four top generals to focus on a last-minute deal in the United States to avoid default.

The lira closed at 1.6720 to the dollar on Monday, firming from Friday's interbank close of 1.6805.

The currency had initially weakened to 1.7 on Friday evening after the shock of the military's four most-senior generals quitting in protest over the detention of 250 officers caught in alleged coup conspiracy investigations.

Investors were monitoring the four-day Supreme Military Council (YAS) on Monday to decide on promotions that this year will include replacing the entire high command.

But analysts played down political risk posed by the latest confrontation between the military and Prime Minister Tayyip Erdogan's government, as the resignations showed the government held the whip hand.

"The macro imbalances and a further re-acceleration in domestic demand is the 'right risk' for investors to focus on," Nomura Global Economics said in a note.

"If anything, we believe that local politics will remain broadly stable while external events such as developments in Syria may create bigger risks for the markets," it said.

Beyond any short-term tensions, analysts saw changes in the military as part of a transition in Turkey away from secularist elites led by the army and bureaucracy to a stronger democracy where elected civilian governments prevailed.

"We believe the resignation of the top generals marks yet another dramatic turn in Turkey's ongoing political transition, with the socio-political power-base shifting gradually away from the Republican elite," said Goldman Sachs analyst Ahmet Akarli.

ISTANBUL INFLATION BOOSTS BONDS

The lira has been under pressure in recent weeks because of a high current account deficit, and doubts about the central bank's dovish stance on interest rates.

Last Monday the lira weakened to 1.7340, its lowest level since March 2009, but rebounded when the central bank cancelled daily foreign currency buying auctions and lowered reserve requirement ratios of banks' foreign currency deposits.

It gained further after the central bank governor said the bank had the tools needed to stop the lira weakening further.

"If we do not hear any negative news coming from the euro area, we can see that the optimism would continue. 1.6500 constitutes a strong support for the USD/TRY. For the EUR/TRY 2.400 is an important level to monitor," said Tolga Aktan, senior associate at Is Investment.

Bond yields fell after Istanbul July inflation data showed retail prices fell 1.57 percent on the month.

Nationwide July inflation data is scheduled for release on Wednesday and is expected to show consumer price inflation dipping 0.07 percent on the month.

The yield on the benchmark May 15, 2013 bond fell to 8.80 percent from Friday's close of 8.87 percent. It had risen to 9 percent in over-the-counter trade on Friday evening after news of the generals quitting.

There was little impact from a three-year bond tap, which was in line with Reuters poll expectations.

The main share index closed down 0.59 percent at 61,926.61 points, underperforming the emerging markets index which was up 1.02 percent.

A decline in the ISM manufacturing index to its lowest in two years in the US caused selling of Turkish equities.

"Today's data from US indicates that the growth in manufacturing sector has almost stopped. This can result in a pricing of flight from risk," said Tufan Comert, strategist at Garanti Investment.

Copyright Reuters, 2011