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End Of CBT Independace - Bye Bye TRY

Published 17/05/2018, 13:07
USD/TRY
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The Turkish Lira was swinging in a precarious position after losing over 21% against the USD since the start of the year.

Geopolitical and domestic uncertainties, real interest rates are negative, and heavy USD current account have markets yelling for deeper devaluation. Yet there was a thin hope that the CBT would regain control of the destabilizing TRY sell-off by raising interest rates. However that was killed when President Erdogan, in a Bloomberg interview, clearly indicated that new executive powers give him the right to drive monetary policy. At that moment, effectively killing the CBT perceived independence and any hope that the TRY sell-off would stop over the mid and long term.

He went on to confirm that he wanted to lower interest rates. The declarations that the CBT should listen to the guidance of the executive head of state significantly lowers the probably of an 'emergence' interest rate hike. Moves in interbank rates indicate that 175bp of rate hikes are priced-in, yet in the broader capital flight environment, the exact implications are less certain. Heading into the June 24th elections is not a given that interest rates would be immediately chopped by 300-400bp, however this result cannot be ruled out.

In the current environment our base scenario for TRY is further weakness and despite short term development that long game for Turkey and CBT remains severely negative.

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