USD/TRY: CBRT's hold tests market patience, lira weakness expected – TDS

The CBRT held the repo rate at 8.25% as expected, but promised more "liquidity measures". The lira suffered an immediate correction, though USD/TRY has now stabilized at around 7.35. If the CBRT does not change course soon, more lira weakness followed by necessary large-scale hikes may be unavoidable, Cristian Maggio, Head of Emerging Markets Strategy at TD Securities, reports.

Key quotes

“The CBRT held the benchmark repo rate at 8.25% as we expected today. This is also in line with the expectation from an overwhelming majority of economists.”

“The CBRT announced another upside adjustment to banks' RRRs for TRY, FX and gold deposits, with the latter two paying the highest toll in terms of liquidity drainage. This, we think, suggests that the CBRT will continue along the same policy trajectory going forward.”

“Given the current policy direction, we see the following as inevitable: slow but steady buildup of more underlying and fundamental (upside) pressure on USD/TRY; more tightening by stealth in replacement of conventional rate hikes; late recognition of the inflation, credit growth and BoP problems leading to further erosion of the FX reserve buffers; and belated but large-scale repo rate hikes (likely starting in September) than would have otherwise been needed if delivered immediately.”