The lira has stabilized so far this week after rallying by a spectacular 10% last week against the dollar. Economists at Credit Suisse suspect that a policy rate hike in the order of 500bps and a simplification of the central bank’s interest rate structure after its meeting on November 19 will pave way for a drop in USD/TRY to the 7.30 area.
“We think that a combination of the consensus expectations – i.e. a policy rate hike of around 500bps and a simplification of the central bank’s interest rate structure – would be perceived as a positive outcome for the lira. A simplified monetary policy framework would reinforce investors’ hopes of a shift towards orthodox policies. Iif this scenario materializes, USD/TRY may fall to the 7.50-7.60 area initially which will pave way for a bigger decline potentially to the 7.30 area as foreign investors rotate back into Turkish assets on the notion that a genuine policy turnaround is in play. But as things stand now, we would not rush to forecast much larger drops in USD/TRY (e.g. to the lows seen in early August of around 6.89). We think that for such levels to be on the cards the central bank would need to over-deliver on rate hikes (e.g. by raising the one-week repo rate by 650bps or more).”
“We think that investors will generally be disappointed if the central bank ‘only’ raises its rate structure tomorrow (say by 400bps-500bps) and does not communicate that it intends to change its interest rate structure. Such an outcome would pave way for higher real rates to the extent that the central bank would continue to use a mix of rates that would including the upper end of its interest rate corridor, in addition to the one-week repo rate. But at the same time, some investors would probably see a need to price out the possibility of a major favourable structural turnaround in the policy setting. The net result could be a spike in USD/TRY.”