LONDON: The Turkish lira could be due a rally against the euro with prospects for Turkey’s economy arguably looking more positive than those of the euro zone.
From an Aug. 3 low of 2.1725 the euro/Turkish lira exchange rate rose to 2.3650 on Sept. 17 on a wave of euro demand after the European Central Bank announced bold but conditional measures to deal with the euro zone crisis.
While some of the shine has rubbed off the euro, pulling back to 2.3220 lira, a further slide is possible, perhaps as far as the 100-week moving average, currently at 2.2950.
Reasons why enthusiasm for the euro might ebb are not hard to find.
Germany’s Ifo economic research institute September business climate survey registered an unexpected fall.
Half the responses came in before Germany’s top court ruled the euro zone’s new and enlarged rescue fund was constitutional, but the survey suggested the European Central Bank’s bond buying plan had not persuaded business the debt crisis was under control.
Question marks remain over Greece’s ability to meet its deficit targets and Spain still seems in no rush to seek external aid to finance its debt.
The Turkish lira might attract renewed investor attention.
While Finance Minister Mehmet Simsek told Reuters on Sept. 6 that Turkey is likely to miss its budget deficit target of 1.5 percent of national output this year, remedial measures began to emerge on Saturday.
Swift fiscal policy responses may engender a positive response from traders.
Despite having cut its overnight lending rate for the first time in seven months on Tuesday the yield on Turkey’s benchmark two-year bond remains an attractive 7.4 percent.
The government’s weekend policy measures included rises in sales taxes on cars, fuel and alcohol that will feed into an inflation rate that Turkish Central Bank Governor Erdem Basci had already seen as reaching 6.2 percent by year-end.
That might constrain any short-term leeway to cut rates further, particularly as the central bank has held the main policy rate, the one-week repo rate, at the all-time low level of 5.75 percent for more than a year.
Basci said on Friday that the central bank would only consider cutting that main policy rate if inflation fell below 5 percent or the lira strengthened sharply, or in the event of a “Lehman-style” bank crisis.
That does not necessarily exclude a degree of toleration of some further lira appreciation.
The central bank still expects the Turkish economy, which was one of the fastest growing in the world last year, expanding 8.5 percent, to grow between 3 and 4 percent this year — just shy of a 4 percent government target — and by 4-5 percent in 2013.
The euro may have to give some more ground against the Turkish lire.
— Neal Kimberley is an FX market analyst for Reuters. The opinions expressed are his own.