The Turkish lira remains the best performing EM currency so far this week due to the latest dramatic reshuffling at the CBRT and at the Treasury & Finance Ministry. Economists at Rabobank are cautiously optimistic that their combined efforts will gradually restore confidence in the lira.
Key quotes
“In an official statement newly appointed Governor Agbal strongly hinted that he will take action to stabilise the lira. Agbal’s remarks support our view that the 1-week repo rate is likely to be raised by at least 500bps on November 19. The setup of monetary policy is likely to be simplified as well. New Treasury and Finance Minister Elvan also issued an encouraging statement pledging to prioritise reining in inflation and focusing on a ‘market-friendly’ transformation of the economy.”
“Our conviction that an important top is in place in USD/TRY and the sharp fall over the last few sessions is indeed the beginning of USD/TRY trading lower over the next 12 months or so has increased. However, this potential retracement over the 12-month horizon should not be mistaken for a multi-year long downside trend.”
“Even if Governor Agbal and FinMin Elvan manage to improve sentiment amongst foreign investors, their biggest challenge may come ahead of the 2023 general elections. Starting from 2022, they may face pressure from President Erdogan to stimulate GDP growth, as it was the case in the past when Turks casted votes. But, this is not the immediate source of concern for the markets.”
“The lira is in a recovery mode from undervalued levels. Foreign investors are also underweight Turkish assets. There is, therefore, potential for the lira to rally if the CBRT and the finance ministry implement orthodox policies with full support, at least for now, of President Erdogan.”
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