The Turkish lira and bonds weakened on Friday on foreign selling ahead of next week's interest rate-setting central bank meeting, with expectations running high for a further hike in banks' reserve requirements. Shares also edged lower, as the Turkish market, having been closed on Thursday for a public holiday, played catch-up with global bourses.
The lira closed at 1.5866/71 against the dollar from a spot close of 1.5820 on Wednesday. The yield on the benchmark February 20, 2013 bond closed at 8.9 percent, and later rose to 8.95 percent in Monday-dated trade, compared with 8.78 percent on Wednesday.
Significant movement in bond yields was not expected ahead of Wednesday's central bank's monetary policy committee meeting. In a Reuters poll, all 17 analysts forecast the policy rate would be held at 6.25 pct next Wednesday. A majority expect required reserve ratios (RRRs) to be raised, with the average forecast being for hikes of some 100-200 basis points.
High credit growth is a key factor behind Turkey's widening current account deficit. With loan growth still at very high levels the central bank is under pressure to supplement recent RRR hikes with interest rate hikes after a parliamentary election on June 12, according to Danske Bank economist Ozhan Atilla. However, analysts said improvements in risk appetite underpinned sentiment.
"There is an atmosphere of cautious optimism in Turkish financial markets," said HSBC strategist Fatih Keresteci in Istanbul. "The basic reason ...is the positive risk appetite in foreign markets." The Istanbul share index closed 0.68 percent lower at 63,298 points, compared with a 0.1 percent rise in the MSCI emerging markets index. In a daily note, Tera Brokers highlighted a report in the Sabah newspaper that the government could take several measures to reduce the current account deficit after the June 12 parliamentary election.
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