UPDATE 1-Turkish lira firms after central bank skips repo auction

Wed Jun 19, 2013 5:42am EDT

* Central bank fixed-rate repo auction not opened

* Shares higher, bonds weaker

ISTANBUL, June 19 (Reuters) - The Turkish lira firmed on Wednesday after the central bank skipped a repo auction to combat currency pressure brought on by concerns about domestic unrest and uncertainty over the U.S. asset purchase programme.

Turkish assets have been volatile since the end of May when anti-government protests flared up, unnerving investors already worried by an expected slowdown in the flow of cheap money from major economies including the United States.

The lira strengthened to 1.8785 against the dollar after the bank announced it was not holding a repo auction, from 1.8853 late on Tuesday. By 0849 GMT, the lira eased back to 1.8823.

Repo, or repurchase, auctions are a way for central banks to increase liquidly into the system by selling securities with the promise to buy them back later. They usually help weaken a currency.

The lira was at the 2.20 level against its euro/dollar basket after it hit its weakest level since October 2011 last week.

"If the bank held a fixed-rate repo auction and if the auction amount was more than needed the lira could weaken further, but the bank tightened the market and halted losses in the lira," said Tufan Comert, a strategist at Garanti Securities.

The central bank has 4 billion lira of one-week repo maturing on Wednesday and 5.9 billion lira repo maturing to primary dealers, who borrowed from the central bank's overnight repo facility, reflecting tighter liquidity conditions.

The central bank kept interest rates on hold on Tuesday and said capital inflows had fallen and hinted it could act again to support the lira currency.

The bank eased currency pressure after supporting the lira last week by selling forex at auctions. It said it would keep monetary policy tight if need be.

"We think the liquidity provided to the banking system will be the main policy tool in the upcoming period as the possibility of a rate cut is diminishing significantly. We expect the bank to take aggressive steps if capital inflows reverse," HSBC Asset Management strategist Ali Cakiroglu said.

Market players were focused on the U.S. Federal Reserve, which concludes a two-day policy meeting on Wednesday. Some of the money the Fed has been pumping into U.S. bonds has seeped into Turkish and other emerging markets.

The Istanbul stock index rose 0.73 percent to 78,311.11 points, outperforming a 0.37 percent drop on the MSCI broad emerging market benchmark index.

The two-year benchmark bond yield rose to 6.97 percent from 6.81 percent late on Tuesday in thin volumes.