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Turkish cbank ‘hints’ at action as corruption row, Fed hit lira Forex sale likely

ISTANBUL, Dec 20, (RTRS): Turkey’s lira fell to record lows on Friday rattled by domestic political tensions and the US Federal Reserve’s decision to start trimming its monetary stimulus programme, prompting the Turkish central bank to threaten more market action. Already hammered this year by expectations that the Fed would begin to stem a flood of dollars that has made its way into global emerging markets, the bank has sold dollars regularly to prop up the lira and prevent domestic inflation from getting out of hand. A row at the top of Turkish society that has seen dozens of senior businessmen, officials and policemen detained this week has only added to the bank’s headaches. On Friday it said in a statement it could sell as much as 10 times the amount previously announced at its forex auctions and analysts said chances were it might follow that threat with direct intervention in markets next week. “While the lira’s level and volatility increases, the possibility for the central bank to intervene directly with forex sales on top of holding forex selling auctions also rises,” said Ali Cakiroglu, a strategist at HSBC Portfolio.

“Turkey-specific developments will determine whether the lira will negatively decouple in the coming period. In a quiet Christmas week, the bank may intervene directly.” The bank has sold a minimum of between $50 and $100 million at regular auctions this year, while also stemming domestic banking liquidity, to try to stabilise the lira in lieu of raising official interest rates. Policymakers’ message that they will not raise interest rates to support the lira also speaks for it intervening first. It last did so at the start of 2012. “After we reached those (today’s) levels in the lira, intervention possibility is high because we reached the limits of the tightening which can be done with the current interest rate corridor,” said Is Investment strategist Ugur Kucuk. Turkey’s need to import almost all of the oil it uses gives it one of the world’s biggest current account shortfalls, making it dependent on inflows of investment and more exposed to any tightening of the supply of cash globally. Its central bank, whose policy has been heavily influenced by the Fed this year, kept interest rates on hold on Tuesday but moved to tighten liquidity sharply as it worried about the impact of the withdrawal of US monetary stimulus.

It said interbank money market rates would be close to 7.75 percent and the weighted average cost of funding will be at 6.75 percent or above in the forthcoming period. A corruption probe, termed by Prime Minister Tayyip Erdogan a “dirty operation” to tarnish the government, has seen 50 people including three cabinet ministers’ sons, prominent businessmen and local government officials detained this week. Dozens of senior Turkish police officers have since been removed from duty accused of abuse of office for keeping the investigation quiet from higher level officials in security institutions. The events are seen widely as a symptom of a power struggle between Erdogan’s ruling AK Party and US-based cleric Fethullah Gulen, who wields influence in the police and judiciary.

“These developments further point towards a genesis in AKP-Gulen conflict rather than any specific corruption issue which can be resolved easily,” a note from Commerzbank said. “Such turmoil could intensify in other areas too leading up to the March (local) elections.” Turkish debt insurance costs surged to 3-1/2 month highs. and the lira touched an all time low of 2.0947 against the dollar compared to 2.0780 late on Thursday. It stood at 2.0881 by 0955 GMT. Still, having sustained heavy losses on Tuesday and Thursday, the main stock index was up 0.45 percent and 10-year benchmark bond yields pulled back a touch from 3 month lows of 10.19 percent hit on Thursday.

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