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Rabobank analysts point out that in the EM space, the Turkish lira remains in the spotlight as the worst performing currency in April due to a long list of negative domestic factors, including the risk of full scale diplomatic spat with the US.

Key Quotes

“President Erdogan reportedly suggested the establishment of a working group on Turkey’s purchase of Russian S-400 missile defence systems during a call with President Trump. While it is encouraging that both presidents discussed this sensitive issue, the market remains concerned that if S-400s are delivered to Turkey, this may result in the most hawkish members of US Congress insisting on imposing sanctions on Turkey.”

“Investors are also eagerly anticipating the publications of the central bank’s inflation report (09:30CET) which may provide more clues why Turkish policy makers led by Governor Cetinkaya shocked investors by removing their commitment to raise rates further if necessary at last week’s meeting. The CBRT has also pledged to reveal more details about its FX reserves, which have been recently boosted by currency swaps.”

“Gains in USD/TRY have been capped below the psychological level of 6.00, but unless investors receive a strong reason from Turkish officials to change their view, a break higher seems inevitable. This would keep USD/TRY on track to revisit the October high at 6.2282.”