LONDON: Citi and Societe Generale both turned positive on Turkey's lira on Wednesday, after the country's President Tayyip Erdogan pledged to embark on a new economic strategy. Erdogan said the strategy would be built on price, monetary and financial stability and that there was a need to rebuild depleted foreign exchange reserves and faith in the currency.
His comments, which contrast with his past calls for lower interest rates, sent the lira surging 3% and sovereign dollar bonds rallying to near five-month highs. Citi said the comments signalled a move to a more orthodox stance on policy.
"This is the most hawkish statement we (have) heard from the president in a long time, and it deserves attention," Citi's Luis Costa wrote in a note. In response, Citi said it had ditched its previous 'underweight' lira call and gone 1% 'overweight' and upped to 'medium-weight' its hard currency credit exposure.
Societe Generale performed a similar pirouette, recommending buying the lira versus both the US dollar and the euro.
"Over the course of this week, evidence has been rapidly accumulating that Turkey is eager to execute a dramatic shift in policy-making back toward a more orthodox framework," Societe Generale's Phoenix Kalen wrote in a note.
Turkey's dollar bonds stood out as the outperformer in an emerging market credit rally after the US election, ING said in a note, with the curve having tightened by around 100 basis points after the changes in the leadership of the central bank and finance ministry.
Former finance minister Naci Agbal was appointed on Saturday to lead the central bank, and former deputy prime minister Lutfi Elvan was named as finance minister late on Monday. Both are longtime AKP members and close Erdogan allies.
In a report prior to Erdogan's comments, Morgan Stanley said Turkish FX offered better value than credit for investors looking to take exposure but added it was looking for reserves data to turn around, in addition to policy actions.
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