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29 Jan 2014
Flash: Despite CBRT move, Turkey’s case a lose-lose situation - TD Securities
FXstreet.com (Bali) - The Turkish Central Banksurprised the market by delivering a set of moves that Cristian Maggio, Senior Emerging Markets Strategist at TD Securities, broadly classifies as 1) tightening of monetary policy and 2) return to orthodoxy.
Key Quotes
"What is important to understand, however, is that tightening is not as much as it appears from these numbers and results fairly in line with our preview. In fact, the repo rate – which used to be the old benchmark and had lost its importance over time – provided a cheap, but unavailable, source of funding."
"For several months prior to tonight’s decision, the CBRT had reduced every funding facility with rates below the lending rate. Increasing both the repo (+550bp) and the MFR (+425bp), the first impression may be that tightening has been delivered in the range of 425-550bp."
"This is not entirely correct as the CBRT returns to funding the market primarily with the repo rate. Accordingly, we will see the average CBRT funding cost move higher from approximately 7.00-7.25% to just above 10.00%. This implies that real tightening in normal days is in the order of magnitude of 300bp, and not 400-500bp. Yet, 300bp of tightening is a level that we defined critical to restore market confidence. In this respect, we believe that the CBRT has done the minimum that the market required."
"It’s difficult to draw a final conclusion as the CBRT has materially tightened rates and reduced uncertainties over the policy framework. In other words, the Bank has reverted to more orthodox measures. The market has praised this decision so far. But nothing is costless. Hiking rates aggressively will cost the CBRT a long period of low growth rates, potentially zero in sequential terms this year. "
"Eventually, the market may assess that Turkey’s case is a lose-lose situation, as we suggested. The currency slide may be halted for now, and further gains could materialize in the coming days, but the adverse macroeconomic backdrop and the external environment may still take their toll on TRY. The market reaction has been hugely positive so far, but the lira is now just trading at levels last time seen only two weeks ago."
"The CBRT’s inertia has cost the bank no less than 100bp of additional tightening. If the market demands more, we are not sure the MPC will deliver again. If they do, the growth outlook will look deteriorate further and may potentially lead to a contraction."
Accordingly, we still think that USD/TRY could trade around 2.20-2.30 in the coming months, while the Xccy curve will hold its flattening bias, with short-term rates around 11% (3m).
Key Quotes
"What is important to understand, however, is that tightening is not as much as it appears from these numbers and results fairly in line with our preview. In fact, the repo rate – which used to be the old benchmark and had lost its importance over time – provided a cheap, but unavailable, source of funding."
"For several months prior to tonight’s decision, the CBRT had reduced every funding facility with rates below the lending rate. Increasing both the repo (+550bp) and the MFR (+425bp), the first impression may be that tightening has been delivered in the range of 425-550bp."
"This is not entirely correct as the CBRT returns to funding the market primarily with the repo rate. Accordingly, we will see the average CBRT funding cost move higher from approximately 7.00-7.25% to just above 10.00%. This implies that real tightening in normal days is in the order of magnitude of 300bp, and not 400-500bp. Yet, 300bp of tightening is a level that we defined critical to restore market confidence. In this respect, we believe that the CBRT has done the minimum that the market required."
"It’s difficult to draw a final conclusion as the CBRT has materially tightened rates and reduced uncertainties over the policy framework. In other words, the Bank has reverted to more orthodox measures. The market has praised this decision so far. But nothing is costless. Hiking rates aggressively will cost the CBRT a long period of low growth rates, potentially zero in sequential terms this year. "
"Eventually, the market may assess that Turkey’s case is a lose-lose situation, as we suggested. The currency slide may be halted for now, and further gains could materialize in the coming days, but the adverse macroeconomic backdrop and the external environment may still take their toll on TRY. The market reaction has been hugely positive so far, but the lira is now just trading at levels last time seen only two weeks ago."
"The CBRT’s inertia has cost the bank no less than 100bp of additional tightening. If the market demands more, we are not sure the MPC will deliver again. If they do, the growth outlook will look deteriorate further and may potentially lead to a contraction."
Accordingly, we still think that USD/TRY could trade around 2.20-2.30 in the coming months, while the Xccy curve will hold its flattening bias, with short-term rates around 11% (3m).