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The USD/TRY pair traded as high as 7.9576 on Friday but the lira has trimmed its substantial losses after the CBRT raised the lira rate on dollar swaps. Economists at Rabobank believe that it is too early to declare that USD/TRY has peaked as geopolitical tensions are set to rock the lira.

Key quotes

“The CBRT raised the lira rate on dollar swaps by 150bps to 11.75% earlier on Friday. The move will increase the costs of funding for local lenders and implies that the central bank is likely to raise its policy rate on October 22 following the 200bps hike delivered last month. While it is encouraging that the CBRT is proactive and intends to support the lira, it is too early to declare that USD/TRY has peaked.”

“The upside bias in USD/TRY remains strongly underpinned by geopolitical tensions with focus on a military conflict Azerbaijan and Armenia. Speaking on Bloomberg Armenian President Sarkissian sounded very cautiously optimistic that his country and Azerbaijan will start negotiating again to stop the worst fighting in decades over the disputed region of Nagorno-Karabakh. He also said that the involvement of Turkey, which supports Azerbaijan, has ‘dramatically’ complicated the conflict and urged NATO to investigate Turkey’s role.” 

“Armenia and Azerbaijan accepted an invitation by President Putin to hold talks in Moscow on Friday. The meeting could be a first step to a ceasefire, which in turn would ease the selling pressure on the lira.” 

“There are other major issues that will continue to weigh on the lira. These include the dispute with Greece over drilling rights in the Eastern Mediterranean and the risk of US sanctions as Turkey intends to test the S400 defence system bought from Russia.”