Traders Betting on Turkey Rate Hike Find Solace in These Charts

(Bloomberg) -- Betting on rate hikes in Turkey is rarely easy given President Recep Tayyip Erdogan’s long-held distaste of higher borrowing costs. But traders positioning for such a prospect ahead of next week’s central bank decision can draw support from some of the most recent economic data.

Turkish assets surged after this week’s announcement to hold snap elections fueled speculation that policy makers may raise borrowing costs on April 25 to backstop the lira. The currency has rallied more than 3 percent from its record low of 4.1934 per dollar earlier this month.

While the monetary authority’s track record means there are still hold outs among investors, below are two charts based on the latest central bank data that may back Turkish bulls.

1. Inflation expectations continue to increase:

Traders Betting on Turkey Rate Hike Find Solace in These Charts

The lira’s slide earlier this month pushed expectations for inflation over the next 12 months to their highest since 2004, above the upper limit of the central bank’s own forecast range.

This increases the odds of a tightening, according to Erkin Isik, a strategist at Turk Ekonomi Bankasi AS, who expects a 50-basis-point hike next week. Isik recommended investors buy 10-year notes, targeting an decline in the yield to 12.5 percent.

On Friday, government bonds were set for their biggest weekly gain this year, with the 10-year yield falling almost 50 basis points to 12.63 percent.

2. Local investors are buying foreign currencies again:

Traders Betting on Turkey Rate Hike Find Solace in These Charts

Turkish investors bought a net $1.35 billion worth of overseas currency in the five days through April 13, the first increase in five weeks, supporting the argument that the central bank should raise rates to restore the allure of the lira for domestic buyers. Turkish companies sit on more than $330 billion of foreign-currency debt, and should they start rushing to buy dollars and euros if they lose faith in the lira, it would suffer.

On April 11, in the midst of a sell-off that sent the lira down as much as 2 percent against the dollar, market moves suggested “there was almost no bid for lira” from local investors, according to Inan Demir, a London-based economist at Nomura International Plc.

“Historically such price action has been a precursor of central bank action, and sure enough immediately after that we saw signals of action” from the prime minister, Erdogan’s chief economic adviser, and from the central bank governor, Demir said.

The central bank will probably raise its late-liquidity rate next week by 50 basis points to 75 basis points, while such a move could cause the lira to strengthen to about 3.92-3.94 per dollar in the run-up to the June election, according to Nomura.

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