TRY in wild swings

Volatility in EM FX continues to fuel speculation of a wider risk unwind. This time its events in Turkey, which are driving traders into safe-haven trades. Investor are dumping the Try as years of poor financial managements, crony-capitalism, less independent CBT and political uncertainty are now in play. Rising US yields are clearly the catalyst but weak fundamentals make short TRY trade simpler. USDTRY 1 month atm volatility has spiked above 30. In an attempt to stem the outflows the Turkish central banks unexpectedly jacked interest rates.

Unexpectedly because Present Erdogan recently communicated that the central banks independence would be in jeopardy should he win and expand executive powers on 24th June general election. He express that Turkish interest rate should be lower to support weak growth, rather than higher to target inflation. Wednesday after markets had closed, in an emergence session CBT hiked late liquidity lending rate by 300 basis points to 16.5%. The statements was short highlighting higher inflation fears and weak TRY as primary reason for monetary policy tightening. The immediate reactions in TRY was a relief rally however since then the Try has continued its march higher. We don’t see any relief in TRY sell until after the 24th elections and even then the failure to address key fundamental issues and attractive US rates will likely keep TRY weak.

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