Lira stumbles again as Turkish assets take a hit

ISTANBUL/LONDON: Turkish assets took another hit on Thursday as the lira weakened for a fourth straight day in choppy trade, and dollar bonds tumbled amid lingering worries over depleted FX reserves and costly state interventions to steady the currency.

The lira slipped by more than 0.5% to 7.0060 against the dollar by 1910 GMT, its lowest level since mid-May. The currency also hit a historic low of 8.2962 versus the euro on Thursday.

Ahead of a four-day holiday that thinned market liquidity, regulatory data showed state banks continued to ramp up short foreign currency positions, which have spiked since May. They hit a net $10.2 billion last week, from $9.1 billion a week earlier.

In total, data and calculations by traders show the central bank and state lenders have sold some $110 billion since early last year to steady the lira, with FX interventions ramping up in recent months.

Some analysts have said the renewed lira pressure - two years after a full-blown currency crisis - show the interventions may be running out of steam.

"It is not sustainable. Either they have to allow (the lira) to go, or in a negative scenario you would have capital controls. It stops the bleeding but it also stops trade," said Viktor Szabo of Aberdeen Standard Investments.

Before volatility returned with force this week, with gauges at the highest since May, the lira had hovered around 6.85 for two months. It could be down more, were the dollar index not near a two-year low due to massive US pandemic stimulus.

The central bank's net FX reserves dropped to $28.7 billion last week, the lowest since mid-May. While gross reserves edged up to $51 billion, analysts have said much of that is borrowed money or gold.

Sergey Dergachev, senior portfolio manager at Union Investment, said one risk was Turkish confrontation with France, Greece and others over Mediterranean energy exploration plans and over Ankara's military involvement in Libya.

"Turkey is involved in many geopolitical hotspots and the problem is that those adventures are costly and uncertain," and distract from economic issues, Dergachev said.

Dollar-denominated sovereign bonds fell sharply to mid-May levels with the 2030 issue marking its biggest weekly decline since the coronavirus pandemic hammered global markets in March, Tradeweb data showed.

Other risk measures including CDS insurance climbed to the highest levels in at least two months, while Istanbul's main stock index fell 0.8%