USD/TRY to trade within a wide range of 7.90-8.50 towards rate decision next week – Credit Suisse

In Turkey, the appointments of a new central bank governor and a new finance minister have generated market-expectations of structural market-friendly changes in the government’s and the central bank’s economic policies. Analysts at Credit Suisse expect USD/TRY to trade within a wide range of 7.90-8.50 in the very short run and potentially all the way to the time of the central bank’s rate decision on 19 November. They then see a two-way risk to USD/TRY coming from this rate decision.

Key quotes

“We see potential for USD/TRY to trade within a wide range of 7.90-8.50 in the coming days. The risk of a sizable rate hike next week (19 November) is likely to keep USD/TRY below its all-time highs from last week (of 8.57-8.58). Meanwhile, USD/TRY downside will likely be limited as long as investors remain intrigued about the possibility of a material market-friendly shift in economic policies.”

“Investors already expect a large rate hike in the entirety of the central bank’s policy interest rate structure at the central bank’s meeting next week – perhaps in a move that lifts the upper end of the interest rate corridor by 400bps-500bps (to a new level of around 19%-20%). If this is correct, investors would consider a decision by the central bank next week to raise rates much less sharply (for example by 200bps) insufficient and an argument against the idea that the recent change of personnel marks a policy shift. In such a scenario we think USD/TRY would rebound by about 2%-3% initially – i.e. to around the 8.35 area from the close of Tuesday’s levels. Markets would then probably look to take USDTRY to new all-time highs.”

“A rate increase of 500bps or more would pave way for an initial drop in USD/TRY to the lowest level seen before the central bank’s policy meeting on 22 October, a level of around 7.78. Under these circumstances, investors would look to buy the lira as they would expect real rates to be elevated enough to create meaningful improvement in the current account and in the outlook for inflation. In other words, a rate hike of about 500bps would lead investors to look for a repeat of the favorable lira-dynamics that played out in the months after the large rate hike in September 2018.”