“We would be careful trying to read too much into the price action in USD/TRY witnessed on Monday. Lira’s liquidity in the offshore market remains tight as reflected in the overnight swap rate sharply again to more than 300% on the day,” Rabobank’s research team argued in the latest EM FX report.
Key quotes
“Essentially, it is not a properly functioning market. Investors who are concerned that the Erdogan administration may turn towards populist measures – instead of prudent policies to rebalance the economy – find it prohibitively expensive to short the lira. Unless the overnight swap rate falls back to the levels seen before the credit crunch, i.e. around 24%, any lira’s recovery should be taken with a pinch of salt.”
“We remain of the view that there is no need to deploy fiscal stimulus to boost support for President Erdogan’s AKP given that next elections will not be held for at least four years. To our mind the next few years are a window of opportunity for the Erdogan administration to rebalance the economy by implementing structural reforms, ideally overseen by the IMF. It is essential to reveal and implement without any delay a comprehensive package of economic reforms to restore confidence amongst investors, households and corporates.”
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