Turkey's lira firmed on Thursday, outperforming some other emerging market currencies, while the main stock index declined more than 2% after a three-day market holiday. China's threat to impose counter-measures in retaliation for the latest US tariffs knocked stocks sprawling on Thursday, checking an earlier attempt to recover from a rout sparked by fears of a world recession.
Wall Street futures signalled another weak open for US stocks, which fell 3% on Wednesday after long-dated bond yields dropped, raising fears the US economy was hurtling towards recession and dragging world stocks with it. Turkey's main BIST 100 share index was down 2.16%, while the banking index declined 4.51% by 1154 GMT. The lira stood at 5.5850 at 1154 GMT, firming more than 0.5% from Wednesday's close of 5.6175. It firmed as far as 5.5480 earlier in the day.
The lira has been attractive to investors due to high real interest rates, helping it outperform its emerging market peers recently, said William Jackson, chief emerging markets economist at Capital Economics.
Turkey's central bank cut its policy rate by 425 basis points last month to 19.75%, while inflation stood at 16.65%. The lira rose to a four-month high last week despite re-ignited concerns over the central bank's independence after President Tayyip Erdogan sacked the bank's governor Murat Cetinkaya, as well as potential US sanctions over Turkey's purchase of Russian S-400 missile defence systems.
The currency has received support from expectations of a looser monetary policy by the US Federal Reserve, as well as the European Central Bank. Jackson said a further slowing of the global economy would likely outweigh the support the lira has received from low Fed rates. He also said some of the positive domestic factors were unlikely to last.
"At the moment, we seem to be at a relatively good stage in terms of geopolitical relations with the US but there's potential that the US congress becomes a bit more hawkish and seeks to impose sanctions," he said.
Ankara and Washington have also been at odds over policy differences in Syria. The allies began establishing a joint operations centre in Turkey regarding the safe zone, marking the first concrete steps after months of talks.
Jackson added that the carry on the lira could lose its attractiveness if the central bank cuts rates aggressively in the future.
Erdogan, who has called interest rate "mother of all evil", said he had sacked Cetinkaya because he did not follow instructions. Murat Uysal, the new governor, has said the central bank has considerable room to manoeuvre. Last week, the central bank also dismissed its chief economist and some department managers.
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