Goldman And Bluebay Is On The Side Of The World’s Cheapest Currency

The lira could be a big winner if Janet Yellen and friends add any fuel to the rally in emerging-market currencies at Jackson Hole.

The likes of Goldman Sachs Group Inc and Societe Generale SA are bullish about Turkey’s currency even as it is on course for its seventh monthly gain. That’s because the lira remains the worst-performer among major currencies over the last 12 months and the advances have been limited. And with a real effective exchange rate that BlueBay Asset Management LLP sees as cheap, it’s also the most undervalued in terms of OECD purchasing power parity.

“On this measure it is screaming cheapness,” said Timothy Ash, a London-based senior emerging-market strategist at BlueBay, which oversees about $52 billion and holds the Turkish currency and bonds among its portfolios.

According to Ash, as President Recep Tayyip Erdogan’s state of emergency drags on and the nation’s companies grapple with vast financing needs, the lira’s rally has been constrained by locals buying dollars. At about 3.50 against the dollar this week, the currency broke above a key technical and psychological level and thus momentum may be poised to pick up for it even before any boost from Yellen and co.

“Relative to other emerging-market currencies, we continue to strongly favor lira,” said Phoenix Kalen, a strategist at Societe Generale in London, citing the country’s “expectations-defying” economic growth, stimulus measures, and a vigilant central bank. She said that high-yielding currencies such as the lira may also be bolstered by policy makers’ speeches at the Federal Reserve gathering in Jackson Hole.

Among foreign investors chasing higher returns, appetite for lira assets remains strong. When adjusted for volatility pays almost twice as much as the runner up, the Mexican peso, and the currency is the highest yielding among major liquid emerging markets.

Noting the most for the period since 2013, this year offshore funds bought a net $5.4 billion worth of local currency government bonds. And helping fuel a 40 percent rally that pushed the benchmark stock index to a record high was a net $3 billion of the nation’s stocks also bought by them.

Werner Gey van Pittius, the London-based co-head of emerging-market debt at Investec Asset Management Ltd said that the currency is being helped and interest in the nation’s debt are being fueled as expectations that inflation will slow as the central bank holds funding costs at near a six-year high are rising.

“The central bank is doing the right thing,” he said. “We are positive on lira.”

The hard currency deposits of local investors were driven to a record $165 billion in June as they have been buying dollars as the lira appreciated and therefore the big hurdle for further gains remains the local investors. Ash said that because these investors remain concerned about the greater centralization of power around Erdogan.

“There will come a point when the locals just throw in the towel, and have to buy lira,” Ash said, adding that might need the government to relax the state of emergency. “If or when locals turn, and given foreigners are still on the bid, the trade could be powerful, so we might be surprised by how aggressive the rally is.”

(Adapted from Bloomberg)

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