(25 OCTOBER 2018)DAILY MARKET BRIEF 2:Stronger Turkish lira ahead of CBRT meeting

Optimism for long Turkish lira (TRY) investors appears to be a sound strategy since the release of US pastor Andrew Brunson on 12 October. The lira remains below the 6 range against the greenback and has risen 4%. Today's Central Bank of Turkey (CBRT) meeting, however, could be a turning point for the trend that started in mid-October amid a weaker USD.

Although the current rally remains TRY supportive, the fundamentals have not changed. Inflation outreaches the 24% threshold (September y/y CPI 24.52%) and despite the recent rise of 625 bps from the prior MPC on 13 September. The current 1-Week Repo rate given at 24% implies a real interest rate near zero.

Therefore, as energy products account for approximately 70% of the rise in Turkish inflation and with it approaching the 25% mark by year-end, market participants will be expecting the CBRT to raise its key rate by 100 bps minimum. No reaction from the monetary institution side will tend to favour a decline in the Turkish lira.

Accordingly, currently trading along 5.7025, USD/TRY is expected to decline along 5.62 in the event of an interest rate hike. If the CBRT decides to do nothing, we can expect a rise of the pair along 5.78.

By Vincent Mivelaz