Turkey’s lira weakens after presidential vote

Turkey’s lira hit a two-month low on Monday and the country’s credit default swaps jumped as a tightly-contested presidential election headed towards a runoff vote, while broader emerging market equities snapped a four-day losing streak.

Turkey’s elections appeared set for a runoff vote, to be held on May 28, after President Tayyip Erdogan led over his opposition rival Kemal Kilicdaroglu, but fell short of an outright majority in Sunday’s election – an event seen as the biggest political challenge to Erdogan’s 20-year rule.

The lira weakened to 19.70 versus the dollar in the opening hours, Turkey-issued dollar bonds fell by more than 5 cents and the cost of insuring exposure to the country’s debt spiked on Monday. Borsa Istanbul issued a market-wide circuit breaker after the benchmark index dropped more than 6% in pre-market trading.

The election results came as a disappointment to investors hoping for a shift to a more orthodox monetary policy amid recent challenges plaguing the Turkish economy including runaway inflation, a searing drop in the lira and devastating earthquakes earlier this year.

“Had the opposition candidate won outright, you would have seen an appreciation in the lira and that would have been based on the assumption that the opposition candidate would return to orthodox policy, restore investor confidence and attract public and private sector capital flows,” said Elliot Hentov, head of macro policy research, State Street Global Advisors. [Reuters]

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