Turkish lira subsides further after central bank issues less hawkish rates advice

Turkish lira subsides further after central bank issues less hawkish rates advice
By Akin Nazli in Belgrade April 25, 2019

Turkey’s central bank stuck with its benchmark interest rate of 24% on April 25 as anticipated. However, the Turkish lira (TRY) depreciated sharply in the wake of the announcement. It was seen as less hawkish than desired because the rate-setters dropped “monetary policy would be tightened further if it became necessary” along with “contribution of fiscal policy to rebalancing process” in their accompanying statement.

The TRY climbed into the 5.98s against the USD following the announced policy decision.

“Not only do they not tighten, but they soften the language… No other way to say this, but pretty ridiculous move by the CBRT [Central Bank of the Republic of Turkey]—it’s like why on Earth would you do that when you are still in the market's cross wires, you are losing FX reserves and the lira is un-anchored. It’s like the CBRT has just made mistake, after mistake over the past couple of years,” Timothy Ash of BlueBay Asset Management said in a note to investors.

Market ‘not willing to commit to Turkey’
The market is not really willing to commit to Turkey at this stage until two issues—whether or not the Istanbul election lost by the ruling party will be rerun and Turkey’s stubborn insistence that it will acquire the S-400 missile defence system from Russia despite US and Nato opposition—are cleared up, according to Ash.

“This is much worse than expected and supports the view that policy has gone off the rails… This signals that any orthodoxy at the central bank has effectively been crushed, since no sane central bank would be leaning dovish at a time like this for Turkey,” Win Thin of Brown Brothers told Bloomberg.

“Clearly the market is disappointed… It seems that the central bank completely overlooked the recent lira depreciation and instead of strengthening its hawkish message to provide the battered currency with some support, the overall message embedded in the statement is less hawkish compared to March,” Piotr Matys of Rabobank told the news agency.

“[The CBRT monetary policy committee] now attaches a stronger emphasis to upside inflationary risks, such as food prices and import costs. Instead of keeping further monetary tightening (if needed) on the table, the CBRT now says that its monetary stance will be geared towards keeping inflation in line with the targeted path. This might be considered as the Bank’s effort to prepare the market for a gradual easing of policy rates. That said, currency developments in particular, aside from the inflation trend, will remain the key determinant of monetary policy,” Serkan Gonencler of Seker Invest said in a research note entitled “CBT sounds a little less hawkish, exerting further pressure on the currency”.

The Istanbul-based brokerage is now less certain a rate cut cycle will be initiated at the next MPC meeting on June 12. Rather, it now attaches a higher likelihood of the central bank only being able to initiate a gradual rate cut cycle from September, or possibly July, onwards.

On the other hand, Ozlem Bayraktar Goksen of Tacirler Invest said in a research note entitled “MPC dropped the tightening-biased wording”: “[The MPC] raised the possibility of a rate cut at the next MPC meetings, probably in June, which has been our base case scenario.

"Little on offer for stockpicker"
“Both TRY and ZAR [South African rand] have broken important levels this morning with TRY dropping through 5.90 and ZAR through 14.50 but I feel more comfortable buying the latter than the former... At the moment, both mkts offer little for the stockpicker—you're either in or out—but it's difficult to make bets when positioning and sentiment are the only arguments in your favour for owning either mkt. The reason for my preference for ZAR versus TRY is predicated on more orthodox central banking and the probability that its electoral outcome is more positive from a mkt perspective than Turkey's was. Sanctions risk for Turkey is also pronounced,” Julian Rimmer of Investec said in a note to investors, prior to the policy rate announcement.  

“I don't doubt the Turks will always be able to fund their CAD [current account deficit] but the issue is at what cost? And if you think the [ruling party] AKP has forgiven the opposition CHP for its temerity in winning most mayoral elections [in the March 31 polls], then look up footage of the assault on its leader, [Kemal] Kilicdaroglu… when he attended the funeral for a fallen soldier on Sunday. The Russ[ians] call this 'provokatsiya'. The risk of civil unrest in Turkey's metropolises is still elevated and it would play into AKP hands. Stay bearish,” Rimmer said on April 23.

The one-week repo rate which serves as the regulator’s benchmark was raised 11.25 percentage points last year after the MPC—at that point seen as losing its independence as it came under clear political pressure from the Erdogan administration to provide cheaper money—responded tardily to Turkey’s summer lira crisis.

Also on April 25, the central bank’s weekly balance sheet showed that its net international reserves fell to TRY156.3bn ($26.9bn) as of April 19 from TRY162.4bn a week ago.

“No longer sure what this means—what is this number? But whatever the CBRT are doing behind the scenes with FX SWAPS with state owned banks, the headline number still dropped USD1.5bn in a week, which is not encouraging given the TRY continued to weaken,” Ash said in a separate email to investors.

As markets are increasing the pressure on the central bank for an explanation of the movements in its foreign exchange reserves and how there appears to be a gaping hole in Turkey’s finances, an official familiar with the central bank’s plans told Bloomberg on April 25 that there might not be any clarity on the state of Turkish reserves until a quarterly inflation briefing on April 30.

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