Lira's U-Turn a Sign Turkey's Rate Rise Is No Magic Bullet

27 Apr 2018, 01:51 PM IST

(Bloomberg) -- It was a surprise, but it wasn’t a big enough surprise to convince lira bears to change their minds about the currency.

Turkey’s central bank defied expectations Wednesday by raising its late liquidity window, the rate it uses to set bank funding costs, by a greater-than-anticipated 75 basis points. The lira immediately advanced as much as 1.3 percent, but then the euphoria evaporated, and by 5:49 p.m. in Istanbul, it was 0.3 percent weaker at 4.0966 per dollar. The main stock gauge extended its decline to 2.3 percent.

For investors such as GAM UK Ltd. and Credit Agricole, the currency’s rapid reversal underlines how policy makers are failing to deal with the issues that led to rising inflation and a widening current-account deficit.

Read More: Turkey Delivers Bigger Rate Hike Than Forecast to Boost Lira

Here’s what analysts and investors had to say:

The Bears

Guillaume Tresca, a strategist at Credit Agricole:

“It’s not enough, in a normal environment they should have done 150-200 basis points
“The communiqué is a disappointment too. The rhetoric is not more hawkish. There is nothing on the liquidity front. It is almost a carbon copy of the previous one. They just added ‘upside movements in import prices have increased such risks,’ in other words it means the recent FX depreciation”
“Market and economists want more, all the more since inflation will re-accelerate very soon. If the CBRT were a normal central bank, they would have hiked by 150-200 basis points. In other words, they are still standing behind the curve”

Paul McNamara, a London-based fund manager at GAM UK Ltd.:

“It’s probably enough to keep lira protected for a while,” but he’s still “very underweight, very bearish” on Turkey’s bonds and currency
“We don’t see evidence of a willingness to address the underlying problems”

Saed Abukarsh, the co-founder of Dubai-based hedge fund Ark Capital:

“With elections coming on, I don’t think this policy statement is going to change the underlying structural issues. I am a buyer of dollars against Turkey’s lira still”
- He is “incrementally” adding to his bullish dollar wagers against the lira, betting the U.S. currency will rise to 4.2.
“The closer the elections draw, the more there will be risk aversion out of Turkey”
It’s “innately wrong to assume hikes result in stronger currency. Hiking rates is not going to help the current-account deficit”

Cristian Maggio, the head of emerging markets strategy at TD Securities in London:

In the short term, the rate increase “may not be enough to put USDTRY on a declining trajectory. We think the lira has more weakness in store going forward, the main reason being that rates should be 300-400 basis points higher to stabilize inflation. A year ago, rates at 13.50 percent would have been enough, but not anymore “because high inflation is deeply entrenched”
“Until Turkey fixes the inflation problem, which is the most staggering macroeconomic imbalance in the country - together with the current-account deficit - and one of the most striking ones among peers, USDTRY will continue to move higher on a trend basis”

The Not-So-Bearish

Richard Segal, senior EM analyst at Manulife Asset Management in London:

“The central bank decision topped the consensus and shows inflation expectations are more important than politics for now”
“The political parties are also focusing more on each other than on institutions, which gives the central bank more latitude to act now. But let’s see about the next inflation report and how the lira behaves in the next few weeks”

Per Hammarlund, the chief emerging-market strategist at SEB in Stockholm:

The central bank did “a little bit more than than the minimum needed for now”
“If global investor sentiment continues to sour, the central bank will probably hike again in one of the following two meetings”

Abdul Kadir Hussain, the head of fixed income at Dubai-based firm Arqaam Capital

“Given overall dollar strength in the past few days, anything less could have been quite damaging short term for the Turkish lira”
“Importantly it has also shown the central bank independence to some extent”

Kiran Kowshik, an emerging-market foreign-exchange strategist at UniCredit SpA:

“In terms of language, the CBRT says with a 75 basis-point hike they decided to implement a “measured tightening”. Back in January 2017, when they hiked by 100 basis points, they had said that they decided to “strengthen the monetary tightening”
- “I would interpret this contrasting language between both moves as suggesting that, this time around, they remain open to doing more if the TRY continues to weaken. So they see a 75 basis points as a measured move.
All in all, I think this rates move should provide a short-term stabilization of the TRY ahead of early elections. This will probably be more visible in the crosses (like EUR-TRY) rather than USDTRY as the USD gains a bid in the near term.”
“In terms of recommendations, we took profit on our bearish TRY exposure on 16 April and yesterday recommended buying a six-week EUR-TRY 5.04 – 4.90 1x2 put spread”
“We believe that the gains in TRY will be limited over the months ahead and the currency will resume depreciation at some point in the second half of the year. But near term gains are likely”

To contact the reporters on this story: Netty Ismail in Dubai at nismail3@bloomberg.net, Constantine Courcoulas in Istanbul at ccourcoulas1@bloomberg.net, Tugce Ozsoy in Istanbul at tozsoy1@bloomberg.net.

To contact the editors responsible for this story: Dana El Baltaji at delbaltaji@bloomberg.net, Justin Carrigan