Turkish lira bucks emerging market rally on probable Biden win

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Turkey’s lira weakened, bucking the trend in emerging markets, as Democrat candidate Joe Biden looked set to win U.S. elections.

A Biden victory may increase selling pressure on the beleaguered lira, which has slumped to successive record lows over the past month. The Turkish central bank should hold an emergency meeting and hike interest rates substantially to stem further losses, some economists say.

The lira fell 0.4 percent to 8.4571 per dollar in Istanbul, extending a decline this year to almost 30 percent. The South African rand, the Brazilian real and the Mexican peso were among a raft of emerging market currencies rallying on Thursday.

Turkish President Recep Tayyip Erdoğan has enjoyed a close personal relationship with President Donald Trump, enabling him to stifle moves by the U.S. Congress to sanction his country for purchasing Russian S-400 air defence missiles. Trump has also sought to block attempts to prosecute state-run Turkish Halkbank on charges of flouting U.S. sanctions on Iran, according to his former national security adviser John Bolton.

The central bank will probably need to hike its benchmark interest rate by at least 500 basis points, or 5 percent, to 15.25 percent, Dutch financial services firm Rabobank said on Wednesday. Monetary policymakers left the key rate unchanged in October, surprising investors who had expected a hike.

“Biden is expected to be tougher on Turkey and insist on penalising Ankara for purchasing the S-400 air defence system,” Rabobank said in a report, according to currency analysis website FXStreet. “Anything less than 500 basis points may not prove sufficient given the scale of the sell-off. The central bank may have to do even more if Biden is elected.”

Biden is leading Trump by 264 electoral college votes to 214, according to U.S. media including Fox News. He requires 270 for outright victory as ballot counting continued in 12 swing states. The Trump administration has moved to halt counting in four of the states – Pennsylvania, Wisconsin and Michigan and Georgia.

The Turkish government’s response to a Biden victory would be crucial, with any attempt to reach out to his team likely to ease market concerns about the risk of sanctions, hence rendering an emergency rate hike more efficient, Rabobank said.

In December, Biden said Erdoğan had to “pay a price”, describing him as an “autocrat” and condemning his policy towards the Kurds. He advocated support for the Turkish opposition.

Biden’s remarks drew sharp condemnation from the Erdoğan government, which said his analysis was based on “pure ignorance, arrogance and hypocrisy”.

Last month, Turkey tested the S-400 over its Black Sea coast, sparking reprimands from the Pentagon and the U.S. State Department. U.S. law prohibits countries from dealing with Russian defence companies under the Countering America’s Adversaries Through Sanctions Act.

Prosecutors in New York opened a case against Turkey’s Halkbank in October last year for its alleged role in helping Iran evade U.S. sanctions. The company could face billions of dollars in fines should it be found guilty.

Ahval

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