Piotr Matys, Senior Emerging Markets FX Strategist at Rabobank, expects the Turkish central bank to rescue the lira once again by hiking its policy rate by at least 100bps which would underpin the downside bias in the USD/TRY pair. Furthermore, the divergence between hawkish CBRT and dovish ECB favours EUR/TRY trading lower.
“We expect Turkey’s central bank to increase the policy rate by 100bps to 18% in response to a weaker lira and higher global commodity prices. In order to keep inflation on track to end this year at 9.4%, it is crucial that the lira offers a sufficiently attractive carry trade to appreciate in the coming months, or at the bare minimum to be relatively stable against the dollar.”
“It would be a major policy mistake not to hike on March 18, especially since the market does not expect a substantial move anyway. The lira would be far more exposed to higher US Treasury yields and a stronger dollar with the policy rate at 17%.”
“We maintain a cautiously optimistic view on the lira based on the assumption that the prospect of rising domestic real interest rates when inflation starts falling in the second half of the year will fuel the downside pressure on USD/TRY and EUR/TRY. This should be seen as a correction lower in USD/TRY and EUR/TRY within the parameters of the well-defined upside trend underpinned by structural imbalances. Unless those imbalances are properly addressed, one can be only tactically bullish on the lira as adopting a long-term positive view would require comprehensive structural reforms to be fully implemented, ideally overseen by the IMF.”
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