Turkey’s central bank (CBT) is expected to deliver a 150bp rate cut at today’s MPC meeting, with markets focused on whether policymakers signal scope to maintain that pace in coming months, ING’s FX analyst Frantisek Taborsky notes.
TRY carry appeal intact amid high reserves
“Given the CBT’s easing bias, lower than expected December CPI driven by non-food items and reserves at all-time highs, we expect a 150bp cut to 36.5% in today’s MPC meeting. However, risks are on the downside towards a lower 100bp adjustment as early indicators point to strengthening pricing pressures in the food group this month and recent data signal a recovery in domestic demand. Market pricing has stabilized at around 150bp for today’s meeting.”
“Although the 150bp move is priced in, it could be a signal to the market that the CBT is still open to this rate cut pace for the next few meetings. We expect a 27% rate for the end of the year, while the market is pricing in around 30.25-30.50%. This leaves room for more aggressive pricing at the front of the curve for us, but the market would need to see a clearer signal from the central bank or another downward surprise in inflation.”
“The Turkish lira remains a largely unchanged story, and we enter this year with the same positive carry view. We believe that the combination of a market resistant to political headlines, a slow but steady cutting cycle and record high FX reserves are ideal for the continuation of the current FX regime. Therefore, we believe that TRY will remain the main carry trade in the EM space. That the market has the same view is also indicated by the increasing long positioning in TRY, which has grown to around USD50bn according to our estimates and surpassed the levels from the March peak before last year’s sell-off.”