By Canan Sevgili
(Reuters) -Turkey's lira extended recent losses, weakening more than 1% against the dollar on Monday, while stocks and dollar-denominated bonds rallied after the appointment of highly-regarded Mehmet Simsek as finance minister.
Simsek won markets' confidence as finance minister and deputy prime minister between 2009-2018 and his appointment is seen signalling a return to more orthodox policy. He said on Sunday there was no choice but to return to "rational ground".
The lira, under pressure since before May elections, weakened as far as 21.18 against the dollar from 20.9 on Friday and is nearly 12% weaker so far this year. It briefly spiked to a record low of 21.8 on May 31.
Data on Thursday showed central bank net forex reserves had dropped to their lowest level on record on May 26, standing at negative $4.4 billion, as it sought to counter the foreign exchange demand.
Simsek's appointment is seen as a signal that President Tayyip Erdogan's newly-elected government is moving away from unorthodox interest rate cuts in the face of high inflation that sent the lira on its long decline.
"The hope is that he (Simsek) could instigate much-needed economic orthodoxy and engage with the market more effectively," said Mohammed Elmi, senior portfolio manager for emerging markets fixed income at Federated Hermes (NYSE:FHI).
"A simple return to credible economic policy could see a marked change in Turkey's investment appeal," he said, pointing to a positive long-term outlook with a young population, a burgeoning middle class and a key strategic location.
Turkey's dollar-denominated government bonds rose as much as 1.1 cents and the cost of insuring against a Turkish debt default fell, with Credit Default Swaps dropping to 541 basis points from Friday's closing level of 550 bps, data from S&P Global (NYSE:SPGI) Market Intelligence showed.
RETURN TO ORTHODOXY
In a sign of relief at Simsek's appointment, the benchmark BIST-100 stock index climbed 3.03% by 0941 GMT and the banking index rose 1.24%.
After his appointment, Simsek said on that Turkey had no choice but to return to "rational ground" to ensure predictability in the economy.
"The details given by Simsek, especially in the handover ceremony, were perceived as a clear signal of a return to orthodox policies," said Serdar Pazi, director at Global Securities Research Group.
"I was expecting a temporary rise in the stock market after the elections regardless of Simsek's appointment. Simsek merely extends gains in the market," said investment strategist Tunc Satiroglu.
Local investors mainly drive equities markets after foreign holdings dwindled in recent years.
"We can expect foreign inflows to resume starting today, as institutional investors are likely to capitalize on the anticipation and start building their positions before seeing the results of Simsek's policies," said Enver Erkan, chief economist at brokerage Dinamik Yatirim.