The Turkish lira firmed on Wednesday as easing tensions with Syria over the shooting down of a Turkish jet boosted market confidence while bond yields declined as expectations of lower funding cost for banks encouraged investors to buy debt.
Turkey appeared to be favoring a diplomatic solution to the crisis, showing little sign of following its strong condemnation of Syria with an immediate military response. Prime Minister Tayyip Erdogan has, however, ordered his armed forces to react to any threat from Syria near the border.
By 0819 GMT, the lira traded at 1.8088 against the dollar, firmer than 1.8135 late on Tuesday. Against its euro-dollar basket, the lira firmed to 2.0344, from 2.0389.
“The lira was under selling pressure because of the issue with Syria. However as the tension is now eased, the lira firmed again. We can see it strengthen towards 2.02 versus the euro-dollar basket,” said Tufan Comert, strategist at Garanti Securities.
The lira weakened sharply in late trade on Friday after news of the shooting down emerged and fell further on Monday.
The yield on Turkey’s two-year benchmark bond declined to 8.68 percent, from a previous close at 8.78 percent.
“The rise in lira liquidity - after the central bank’s decision to increase the upper limit of lira reserve requirements held in forex and continued provision of lira at a cheap rate... instead of expensive intraday repo auctions - pushed banks’ funding costs down,” said Ali Ihsan Camci, the treasury manager of Halk Invest.
“Investors now expect the central bank to reduce the share of expensive monthly lira funding in the total funding stock. This means the funding costs may decline further. That’s why we see short-term bond yields falling,” Camci said.
The Turkish Central Bank at its monthly policy meeting on June 21 raised the upper limit of lira required reserves that can be held in forex to 50 percent from a previous 45 percent.
It said currently banks maintain $14.3 billion for lira required reserves in the central bank’s accounts. If equally used, this measure would boost the bank’s reserves by $2.7 billion and provide 2.8 billion lira liquidity into the market.
Banks’ total funding cost from the central bank was above 10 percent in May but recently declined to around 9 percent. Investors expect it to fall below 9 percent in the period ahead.
Istanbul’s main share index was 0.94 percent up at 60,700 points, outperforming a 0.6 percent rise in the MSCI emerging markets index.