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Analysts at MUFG Bank, point out that the Central Bank of Turkey (CBoT) has not tighten its monetary policy enough to help stabilize the lira that continues to print record lows versus the US dollar. They see USD/TRY trading in the 8.000-9.000 range during the fourth quarter and between 7.7000-8.9000 in the first quarter of 2020. 

Key Quotes:

“Lira selling pressure has intensified after the CBoT decided against raising their key policy rate at their latest meeting. Instead, the CBoT chose to raise the late liquidity window (LLW) lending rate to 450bps above the key policy rate. The CBoT has since been criticised for not tightening monetary policy in a more conventional manner. The weighted average cost of financing at the CBoT has now risen though from a low of around 7.4% in July to almost 13.4%.”

“Market participants still want to see higher real yields on offer in Turkey although doubts remain whether they will be delivered given President Erdogan’s desire for lower rates. The need for tighter policy continues to be highlighted by the elevated rate of inflation. The annual rates of headline and core inflation were running at 11.8% and 11.3% respectively in October.”

“Downward pressure on the lira has been reinforced by rising geopolitical tensions as well including the threat of US sanctions. We expect Turkish policymakers to tighten policy more decisively in the year ahead to slow the pace of lira depreciation.”