End of CBT independace … bye bye TRY

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 regains control of the destabilizing TRY sell-off by raising interest rates. However that was killed as President Erdogan’s 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 TRY sell would stop over the mid and long term.

I went on to confirm hat he wanted lower interest rates. This 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. Move in interbank rate indicate that 175bp of rate hike are price 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 cant not 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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