The more hawkish, the more carry – ING

The main event in the CEE region today is the Central Bank of Turkey meeting, ING’s FX analyst Frantisek Taborsky notes.

USD/TRY remains basically unchanged at 38.000

“This will be the first regular meeting since the March sell-off in the TRY market. In the interim meeting in March, the CBT not only raised the upper band of the interest rate corridor (O/N lending rate) to 46% but also turned it into the effective policy rate by tightening TRY liquidity, while keeping the policy rate (1-week repo rate) flat at 42.5%. These developments suggest that the CBT is likely to remain mute today.”

“Benign March inflation data, with an improvement in the underlying trend, will also lead the CBT to keep the policy rate unchanged rather than hike it. However, the CBT’s daily balance sheet has, in recent days, shown a continuation of the pressure on the net FX position. Therefore, we do not rule out a further adjustment in the upper band. Overall, market expectations show unchanged rates, but the market would probably not be completely surprised if there is some rate tightening today.”

“USD/TRY remains basically unchanged at 38.000 since the spike in mid-March. In recent days, however, we have started to see the central bank again allowing the TRY to weaken slightly, but at a slower pace than before, leaving a still fat carry on the table. As we commented here after the March sell-off, we still like the TRY as a carry trade and it is the March move in the currency that gives the central bank the resolve to maintain only slow TRY depreciation and not allow additional inflationary pressures, keeping the currency attractive to investors and pushing against the outflows we have seen since the March move.”