USD/TRY to test the key 7.40 technical pivot if CBRT delivers a proper rate hike – Rabobank

On November 19 Turkey’s central bank will hold its most important interest rate meeting so far this year. It will be the first proper test for the newly appointed Governor Agbal. Expectations are very high and the CBRT cannot afford to disappoint the market. The CBRT should simplify monetary policy and raise the 1-week repo rate, according to economists at Rabobank. If delivered, the USD/TRY should break below the 7.40 mark. 

Key quotes

“With inflation on track to end this year above 12%, a proper rate hike is required to bring real interest rates to positive territory to restore the CBRT’s credibility. We, therefore, anticipate the 1-week repo rate to be raised by 500bps to 15.25%. The setup of monetary policy should be also simplified to strengthen the message that the central bank is firmly in favour of an orthodox policy. The central bank should explicitly say that funding will be provided at the 1-week repo rate.”

“Based on our 500bps call we expect USD/TRY to break below 7.40, which is an important technical pivot. A cluster of technical levels at 7.26/23 would be our next short-term target.” 

“While we do see scope for USD/TRY to fall well below 7.00 on the 12-month horizon, it is important to take it step by step starting with the monetary policy meeting on November 19. Every decision that the CBRT makes will be critical.”

“If the market ends up disappointed with a relatively small rate hike at the upcoming meeting, the benefit of the doubt that the market has given Governor Agbal will evaporate very quickly not only preventing USD/TRY from retracing further but potentially reigniting the upside pressure.”