Turkey on the spot

Today will see action by the Central Bank of Turkey, expected to increase the one-week repo rate by 3.25% to 21%. Any smaller increase would trigger another sell-off in the Turkish lira, which could bring USD/TRY back above 7.0. After falling 1.35% yesterday, USD/TRY edged higher to 6.38 this morning, up 0.52%. Signals from the option market suggest that investors are not unnerved. The 1-month 25 delta risk-reversal measure is stable at 8.7% - compared to 1.6% in mid-August – while the 1-month ATM implied volatility stands at 34% - compared to 61% a month earlier.

The Bank of England and the European Central Bank will also make announcements today, but not critical ones. The BoE and the ECB will hold rates steady at 0.75% and 0.0%, respectively. We may see changes of tone regarding economic outlook, but both central banks will avoid hawkishness.

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