Turkey Central Bank Shock Has Strategists Eyeing Further Lira Drop
The lira may hit the 10-per-dollar level before year’s end after the Turkish central bank shocked the market with a rate cut twice as deep as economists predicted.
The psychologically important threshold “is within reach now,” said Per Hammarlund, chief EM strategist at Skandinavska Enskilda Banken. Options traders agree: there’s now a more than 60% chance that the lira will weaken to 10 before January, data compiled by Bloomberg show.
The Turkish currency stumbled as much as 2.8% to a record 9.4867 against the greenback on Thursday after the central bank cut its one-week policy rate 200 basis points to 16%. The reduction came after President Recep Tayyip Erdogan ousted a trio of policy makers opposed to his calls for lower borrowing rates.
Here’s what strategists are saying after Turkey’s latest rates decision:
Hans Gustafson, Swedbank:
- “It’s impossible to have a lira forecast these days. How do you forecast a currency when there are no rules?”
- “They’ll probably cut at the next meeting in November, but it’s not that important any longer. They now have their own rules of the game and this is getting closer to a real balance of payments crisis with hyper-inflation”
Henrik Gullberg, Coex Partners:
- The easing cycle “will end only when influential people are sufficiently fed up and they talk to the President, such as corporate leaders, whose support Erdogan is dependent on”
- “It’s hard to say what level, but there must be a limit to how much lira depreciation corporates can stomach”
Nick Stadtmiller, Medley Global Advisors:
- “If they were done easing, they would have signaled this clearly in the statement. The fact that they referred to limited room for further rate cuts tells me they intend to ease policy a bit more in the coming two months”
- “The lira will probably go past 10 per dollar this year, although the pace of depreciation will be slower than in previous episodes,” because depreciation will now likely result from domestic capital flows
- “Foreign ownership of lira assets is already so low that there isn’t much room for further foreign capital outflows from Turkish markets”
Per Hammarlund, SEB AB:
- “To be fair, the central bank had some room to cut. Credit growth has slowed and money-supply growth too, pointing to lower inflation ahead. However, to cut this aggressively when inflation is still rising further undermines the credibility of the central bank”
- “Unless the central bank signals an intention to slow the cuts, USD/TRY will spike well above 10.00”
Cristian Maggio, TD Securities:
- “Both the market and the economist consensus were positioned for some large-scale moves today, but 200bps appears to have come beyond the more pessimistic-end of the spectrum of expectations.”
- “We think the CBRT is throwing the market a bone by letting investors know that there may be smaller cuts, or no cut at all, in the upcoming meetings this year. We believe this is just to manage expectations and therefore contain the lira selloff. Eventually, the CBRT will respond to lira performance more than the inflation dynamic”
- “As the CBRT decision cannot be explained by any fundamental consideration, it has to be classified as a policy mistake, and one of a political nature. Therefore, the Turkish curve is likely to steepen substantially”
Liam Peach, Capital Economics:
- “Any remaining confidence in the credibility of Turkey’s central bank was shattered”
- “The risk of another balance of payments crisis akin to that in 2018 will continue to grow”
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