Lira strengthens; yuan, Argentina peso weaker; Argentina bonds unchanged to slightly lower

By Rebecca Melvin

New York, Aug. 15 – Despite strengthening of Turkey’s currency for a second straight day on Wednesday, market players were unconvinced that emerging markets were out of the woods, and many other emerging markets currencies were weaker, while emerging markets debt was under pressure as investors turned to low-risk assets like U.S. Treasuries.

The yield on the 10-year U.S. Treasury benchmark fell to 2.853% from 2.895% late Tuesday as prices were bid higher.

The lira was up another 6% on Wednesday on top of a 5% climb on Tuesday as the government has twice taken measures to tighten lira liquidity and curb selling of the currency as well as eased rules on restructuring loans.

The banking watchdog BDDK moved to limit foreign exchange swap transactions to help the currency on both Monday and Tuesday. The squeeze on liquidity of lira in the market has the effect of pushing interest rates higher even though the central bank has not changed the official benchmark interest rate. The BDDK has cut the limit for Turkish banks’ foreign exchange swap, spot and forward transactions with foreign banks to 25% of equity.

But while the currency and bonds were better, the lira bounced back to 6.03 to the U.S. dollar, from a record low of 7.24 notched early Monday, and Akbank TAS’ 7.2% notes due 2027 were back to 60 from 58, economic fixes were seen as superficial, and political and trade pressures continued to mount.

On Wednesday Turkish President Recep Tayyip Erdogan announced new import tariffs on U.S. products including rice, cars, alcohol and coal, totaling $533 million. He has also called for a boycott of U.S.-made electronics and has asked Turks to sell their dollars and euros in favor of the nation’s currency.

But Erdogan is developing alliances away from the United States. Qatar pledged on Wednesday to invest $15 billion into Turkey’s economy, including a package of economic projects, investments and deposits expected to be channeled into Turkish banks and financial markets.

Many believe that the central bank will eventually raise rates. Meanwhile, an investor call between Turkey’s finance minister and some 3,000 people is slated for Thursday.

China’s yuan fell almost 1% to 6.95 to the U.S. dollar on Wednesday, its weakest level in about 18 months after economic data fed speculation that the People’s Bank of China will intervene with more fiscal stimulus to boost the currency and prevent it from pushing through 7.0 to the dollar. Tighter credit conditions and slowing economics are causing worry for the Asia region.

The Brazilian real and South African rand were also lower on Wednesday. Meanwhile prices of oil dropped as did prices for a number of other commodities like copper.

The Argentine peso did not respond immediately to measures to stabilize that currency. But Argentina’s sovereign bonds were unchanged to slightly lower on Wednesday as the Argentine peso slipped amid ongoing market turmoil tied to devaluation of emerging markets currencies and the strengthening dollar.

Argentina’s own government has taken measures to increase the resilience of its economy that were seen as significant and supportive to the debt market, a New York-based trader said.

Trading volumes are low as is typical for mid-August, but even for August they are below average, the trader said.

The government has reduced retentions for the provinces and put in place soft commodity funds, the trader said.

Venezuela was quiet as it remains in its own bubble, faced by runaway inflation, inability to invest in oil, its top export product and U.S. sanctions.

“I didn’t see anything that it going to change in Venezuela,” the trader sad.

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