Central Bank to cut rates, bearish trend in currency to prevail

In its May meeting, Central Bank of Turkey (CBRT) is expected to cut its policy rate further, with Forex survey indicating a consensus of 50 basis point  drop to 8.25%.   Supporting CBRT’s presumptive easing is the recent strength in TL, largely driven by minor capital controls, such as shuttering the London swap market and what appears to be a new crackdown on FOREX transactions of brokerages. TD Securities expects a 100 basis point cut, while Rabobank argues the bearish trend TL is here to stay.  All these make sense, because President Erdogan doesn’t waver from his goal of  “low interest rates”, while  Turkey’s quest for swap lines with any Central Bank on the Planet who would do it, is yet to reach a conclusion. In the interim, FX continues to leave the country through banks and corporates paying of part of their maturing FX debt, and of course the current account deficit.

TD Securities:  Large rate cut, CBRT swap transactions to the fore

Next week, the Central Bank of the Republic of Turkey (CBRT) will have its policy meeting.  Analysts at TD Securities expect the CBRT to cut the repo rate by 100bps to 7.25%. They think the lira (TRY) will perform based on swap activity rather than CBRT’s rate decision.

“We think the lira will perform based on swap activity rather than CBRT’s rate decision. We expect a minor negative reaction for TRY if the CBRT cuts 100bps as we expect, but may recover shortly after. For now, we see TRY well supported vs USD on the back of swap agreements that the CBRT is growing daily. With three large swap redemptions next week, before and after the CBRT meeting, we will see how TRY reacts to them. A neutral reaction on 18 and 20 May will likely leave USDTRY also relatively neutral to a CBRT cut.

USD/TRY: Bullish trend remains intact – Rabobank

The underlying USD/TRY bullish trend remains intact due to prevailing market concerns about Turkey’s vulnerabilities exacerbated by the coronavirus crisis and a weaker lira, per Rabobank.

Key quotes

“The prospect of the worst tourist season in many decades accompanied by a sharp fall in good exports and the plunge in FX reserves pose a major challenge for Turkey, which needs substantial inflows of hard currencies to finance its imports and short-term FX debt obligations.”

“We will be first in line to adopt a constructive view on the Turkish lira as soon as the inefficient and counterproductive strategy of defending the currency at all costs by spending a substantial amount of USDs on FX interventions and discouraging market participants from trading the lira is abandoned.”

“At this stage, the pullback in USD/TRY from the 7.2690 high is just a short-term correction within the bullish trend that remains intact.”

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