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Wednesday, 13 December 2017

Trend still your friend despite CBRT support on Turkish lira

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The lira has hit another new low against the US dollar as concern over the corruption probe and speculation over early elections hit sentiment.

Once again the weakness in the lira likely reflects an exodus of real money as they look to cut/trim longs on the bond and equity markets.

The two-year bond yield is at its highest level since late August while the equity market has broken through its August low. In the last three trading sessions the Turkish main index has lost just over 10%. In addition to the record lows of the TRY against the USD we also have a psychological print of 3.00 on EUR/TRY (also a record).

As a response to TRY weakness the CBRT has upped its support by increasing the FX-selling auction amount to US$600m on December 30 from US$450m. Such CB action tends to smooth currency weakness and until market sentiment towards the political situation improves we should expect further new TRY lows. The CBRT is clearly looking to use the low volumes and illiquidity in the market to impact the TRY with its aggressive intervention.

A rapid depletion of FX reserves is a strategy that only builds pressure for accelerated depreciation of the TRY once CBRT support stops. Unlike the RBI, BCB or the BI who also have large c/a deficits the CBRT is less eager to hike the policy rate seeing this as a last resort. But even on interest rates the CBRT has preferred a path of keeping the policy rate on hold at 4.5% and instead focused on widening the rate corridor especially the lending rate.

If the TRY fails to stabilise then it seems likely that a further 50bp hike in the lending rate is likely early in the new year. Intervention simply uses up valuable FX reserves and provides an avenue for real money to exit their longs. The TRY is increasingly looking like it is set for a much bigger and more rapid drop.

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