HALISTER1: TURKEY ROUNDUP: Central Bank Cuts Still in Play as TRY Rebounds

TURKEY ROUNDUP: Central Bank Cuts Still in Play as TRY Rebounds

(Bloomberg) -- Turkey’s central bank is scheduled to decide on interest rates Tuesday, just days after an attempted political coup sent the lira reeling.
  • After CBRT promised unlimited liquidity to lenders yesterday to help them ride out uncertainty, analysts see today’s pricing action as key gauge to determine what the central bank will do
  • TRY +2.1% at 2.9552 vs USD; it tumbled ~6% late Friday, before rebounding once the coup failed
  • Deutsche Bank
    • Expect some further TRY underperformance but the extent of weakness, and how long it lasts for, is difficult to quantify given the opposing forces in place, analysts incl. Kubilay Ozturk say in client note
    • It’s difficult to see TRY outperforming high-yielding peers in the near term, given additional risk premia
    • Don’t change constructive call on Turkish bonds and need to wait for the initial market reaction and further steps by central bank
    • Given that MPC is on a crisis management mode, a consistent prudent approach calls for steady rates tomorrow
    • The bank could carry on with rate cuts in an interim meeting, assuming a correction in market sentiment takes place in coming days
  • ING
    • Don’t rule out further rate cuts given today’s TRY rebound, though it may be a 25bps reduction, rather than 50bps as expected prior to the attempted coup, analyst Petr Krpata says in e-mailed comments
    • CBRT may still opt for a 50bp cut to send the signal that Turkey is back to business as usual; prefer a cautious 25bp cut depending on reaction from foreign investors at the beginning of the week; or take no action if both locals and foreigners rush into the USD
  • BNP Paribas
    • Market reaction will likely be pivotal in central bank’s decision tomorrow, strategist Erkin Isik says in client note
    • Further depreciation pressure on TRY is likely to encourage them to continue cutting the upper bound of interest-rate corridor, in line with previous expectations
    • CBRT is ready to act in case of further risks over financial stability; that has led to some relief to markets
  • UniCredit
    • Political twists will probably have profoundly negative implications for TRY, strategists including Vasileios Gkionakis say in client note
    • Turkey remains an externally imbalanced economy with limited currency reserves to stave off pressure from outflows
    • Exchange rate will remain exceptionally vulnerable to negative political news
    • These developments provide President Erdogan with very strong leverage to further consolidate his power through constitutional changes, something that may include seriously compromising the central bank’s independence
    • The latter would generate an additional negative structural shock for TRY
  • Commerzbank
    • CBRT likely to leave interest rates unchanged tomorrow to help the lira calm down quickly, analysts including Thu Lan Nguyen write in note
    • See USD/TRY likely to level out around 2.90 with the help of the central bank
Alert: HALISTER1
Source: BFW (Bloomberg First Word)

Tickers
UCG IM (UniCredit SpA)

People
Erkin Isik (Turk Ekonomi Bankasi AS)
Kubilay Ozturk (Deutsche Bank AG)
Petr Krpata (ING Groep NV)
Thu Nguyen (Commerzbank AG)
Vasileios Gkionakis (UniCredit SpA)

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