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28 Jan 2015
CBRT may use additional monetary tightening if TRY sell-off aggravates – TDS
FXStreet (Barcelona) - Cristian Maggio, Head of Emerging Markets Research at TD Securities, expects the need for additional monetary tightening by CBRT to arise in case the Turkish lira extends its sell-off, further anticipating Turkish rates to continue adjusting lower.
Key Quotes
“The market is already priced for some degree of easing. While it’s difficult to say how much is priced in exactly, implied yields suggest that not much is discounted for next week (-25bp at the best of our guesstimates).”
“In 1 to 6 months, however, implied expectations are definitely more dovish and it looks like 75-100bp of easing are in the cards.”
“Assuming that the lira continues to adjust to more dovish expectations until February 4 (i.e. TRY weakens against the basket from 2.54 at the time of writing), if rate cuts do not exceed 50-75bp, we may see the lira paring back some of these losses. But it is unlikely that USDTRY can trade far below the upper-end of the 2.35-2.40 trading range in the coming weeks. “
“Against the EUR, however, the lira is still likely to post a positive performance this year, which reflects more stability in the TRY basket than vs USD.”
“We expect Turkish rates to continue adjusting lower with a steepening bias in the curve. This adjustment is likely to continue for a while, unless the ‘breaking point’ is reached on the FX front.”
“If the lira sells off too aggressively, the CBRT may have to use the ‘additional monetary tightening day’ strategy (or what is left of it after next week) and push front-end rates higher towards the upper-end of the rate corridor. This could see brisk 150-200bp moves in the front-end of the curve, after an initial increase of vol and early signs of momentum reversal. This would be the signal to unwind received positions.”
Key Quotes
“The market is already priced for some degree of easing. While it’s difficult to say how much is priced in exactly, implied yields suggest that not much is discounted for next week (-25bp at the best of our guesstimates).”
“In 1 to 6 months, however, implied expectations are definitely more dovish and it looks like 75-100bp of easing are in the cards.”
“Assuming that the lira continues to adjust to more dovish expectations until February 4 (i.e. TRY weakens against the basket from 2.54 at the time of writing), if rate cuts do not exceed 50-75bp, we may see the lira paring back some of these losses. But it is unlikely that USDTRY can trade far below the upper-end of the 2.35-2.40 trading range in the coming weeks. “
“Against the EUR, however, the lira is still likely to post a positive performance this year, which reflects more stability in the TRY basket than vs USD.”
“We expect Turkish rates to continue adjusting lower with a steepening bias in the curve. This adjustment is likely to continue for a while, unless the ‘breaking point’ is reached on the FX front.”
“If the lira sells off too aggressively, the CBRT may have to use the ‘additional monetary tightening day’ strategy (or what is left of it after next week) and push front-end rates higher towards the upper-end of the rate corridor. This could see brisk 150-200bp moves in the front-end of the curve, after an initial increase of vol and early signs of momentum reversal. This would be the signal to unwind received positions.”