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Turkish markets underpinned by growth data, CPI eyed

turkish economy

Lira off lows after data shows Q1 growth slowdown; Bonds also off lows after data; Trading thin a day ahead of key inflation numbers

July 2, 2012 3:44 by

The Turkish lira and bonds came off lows after growth data suggested the country’s economy was on track for a controlled slowdown, though trading was thin a day ahead of key inflation numbers.

By 0845 GMT, the lira traded at 1.8096 against the dollar, easing from 1.8075 late on Friday but firmer than 1.8117 before the data. Against its euro-dollar basket, the lira stood at 2.0483 from 2.0490.

Shares traded lower, lagging the emerging markets index.

Gross domestic product growth slowed to 3.2 percent year-on-year in the first quarter, data showed on Monday, exceeding a Reuters poll forecast of 2.8 percent but slowing from 5.2 percent in the fourth quarter.

Traders said the slowdown increased chances of a central bank policy easing later this year – either a cut in its 5.75 percent policy rate or in its 11.5 percent overnight lending rate – though Tuesday’s inflation numbers would play a bigger role in any such decision.

“There wasn’t any major reaction after the growth data which showed the central bank’s measures to cool down domestic demand and the euro zone crisis have resulted in a soft landing… as desired,” said Tufan Comert, strategist at Garanti Securities.

“Investors are mainly focused on tomorrow’s inflation data. If the figures are far below expectations, this would reinforce prospects of an easier monetary policy and would slightly weaken the lira.”

The Turkish currency hit a two-week low against the dollar of 1.8340 last Thursday after central bank governor Erdem Basci said the bank’s inflation forecast might be cut if commodity prices remained low.

The central bank has a 6.5 percent mid-point forecast for annual inflation and a 5 percent target this year. June inflation data is due on Tuesday at 1000 GMT.

In order to slow an overheating economy and counter inflation and a large current account deficit, the central bank has since late 2010 used a complicated policy mix based on daily liquidity injections, high reserve requirement ratios, and adjustments in its overnight borrowing and lending rates – known as the interest-rate corridor.

The yield on Turkey’s two-year benchmark bond was at 8.49 percent, down from 8.51 percent before the data but up from 8.47 percent on Friday.

“Trading is thin. We can see some profit taking after last week’s rally. The fall in inflation and narrowing of the current account deficit revive expectations that Turkey will be upgraded to investment grade,” said a fixed-income trader.

“Prospects of a loosening in monetary policy are greater after the growth data, which indicated a soft landing. This supports bonds. I expect the benchmark yield to fall as far as to 8.20 percent,” the trader added.

Istanbul’s main share index was 0.26 percent lower at 62,399 points, underperforming a 0.41 percent rise in the MSCI emerging markets index.

(Writing by Seltem Iyigun; Editing by John Stonestreet)

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