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The main focus, unfortunately for the wrong reasons, remains on the Turkish lira which extended its already massive losses by more than 5% today, after Japanese individual investors capitulated on their long lira positions against the yen, explains Piotr Matys, EM FX Strategist at Rabobank.

Key Quotes

“Bloomberg reported that, until recently, Japanese margin traders held 323,537 net long positions on the lira against the yen as of May 15 according to data from the Tokyo Financial Exchange. However, the sharp fall in TRY/JPY to a record low forced them to close their positions causing a sharp spike in USD/TRY and EUR/TRY overnight when liquidity is usually relatively low.”

“While the lira is in a free fall, paradoxically the severely battered Turkish currency could be close to an important low, at least over the short-term horizon.”

“The capitulation of Japan’s retail investors may be interpreted as a contrarian signal to purchase an already substantially oversold lira.”

“Turkish policy makers cannot tolerate such a rapid pace of currency depreciation for much longer. It is not only about persistently high double-digit inflation but, more importantly, about preserving financial stability and avoiding a hard landing.”

“Essentially, there is a sufficiently strong argument supporting the notion of a “proper” rate hike, i.e. 400bps or perhaps even more after the lira plunged almost 16% so far this month extending its year-to-date losses to more than 21%.”