USD/TRY has managed to trade in a tight range below the psychological 8.00 handle in the last ten days or so after rising steadily since late August. Economists at Credit Suisse continue to hold a short-term target range of 7.65-7.75 for the USD/TRY pair in the run-up to the central bank’s rate decision on October 22. They assess the response of the lira to different scenarios for the policy rate.
Key quotes
“In terms of potential impact on USD/TRY, a hike tomorrow in Turkey’s interest rate structure in the order of 200bps (slightly more than the consensus forecast) will lead to an initial decline in USD/TRY by up to 1% – i.e. to around 7.80 by taking end of Tuesday (20 October) closing levels as a reference. We base our assessment partly on USDTRY’s reaction to the central bank’s surprising rate hike on 24 September.”
“Further declines in USD/TRY (well below 7.80) will require the central bank to ‘deliver’ a follow-up to the rate hike by continuing to raise the effective funding rate on the days after the rate decision, at least at the pace that has been in evidence recently.
“A decision by the central bank to leave the policy rate unchanged would keep USDTRY relatively stable initially, potentially with the help of FX sales by state-owned banks. But it will most likely create underlying lira depreciation pressure which will eventually take USD/TRY above 8.00 over a few days.”
“We stick to a 7.65-7.75 short-term forecast for USD/TRY. This forecast reflects the view that we find a rate hike tomorrow more likely than a no-change outcome. We will re-assess our short-term USD/TRY forecast based on the outcome tomorrow.”
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