Turkish stocks and the value of the lira were little changed on October 6 ahead of a key U.S jobs report that is expected to raise bets on a December rate rise by the Federal Reserve that in turn will bring the lira under pressure.
The main stock exchange index, BIST-100, inched up 0.05%, while the Turkish lira strengthened 0.4% to trade at 3.0399 per dollar on October 6. The yield on the 10-year bonds eased from 9.75% to 9.68%.
The government’s decision to extend the state of emergency and prospects of another rate cut by Turkey’s central bank are weighing on investor sentiment. Renewed expectations for a FED rate hike and the rise in oil prices also keep Turkish assets under pressure.
“As the US Fed raises interest rates next year, we expect the lira to weaken, reaching 3.50/$,” analysts at Capital Economics wrote in a note on October 6, adding that one implication is that the weaker currency (alongside other factors) means inflation will remain high. According to the analysts, the central bank may be forced to reverse the current easing cycle year. Thy expect the O/N lending rate to drop to 8.00% this year (from 8.25% at present), before rising to 10.00% next year.
“The hit to Turkey’s economy from July’s military coup attempt is likely to be short-lived, but even once the impact dissipates, the economy’s large vulnerabilities mean activity will remain sluggish over the next couple of years,” the analysts said.
But the government is confident that Turkey’s economic fundamentals are strong enough to weather the headwinds. It slashed growth forecasts for 2016 and 2017 in what it said the most negative scenario but remained rather optimistic about inflation outlook. The government vowed structural reforms to put the economy on a more sustainable path while it is taking measures to stimulate domestic demand.
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