Date: 12 Sep 2018

The Turkish lira (EURTRY, USDTRY, TRYJPY) may have been relatively more stable in recent sessions but traders might well conclude that much of that is attributable to the fact that the Central Bank of Turkey (CBoT) let it be known, following last week’s spike in Turkish inflation to 17.9 percent that its “monetary stance will be adjusted” when it meets on Thursday.  Yet data this Monday showed that while Turkey’s GDP expanded in Q2, the pace slowed to 5.2 percent from Q1’s 7.3 percent growth rate. That leaves CBoT Governor Murat Cetinkaya with a dilemma. If the CBoT hikes too aggressively, it could help push Turkey into a recession (which may be coming anyway but which the central bank would wish to avoid being blamed for), but if it does too little then the TRY might be negatively affected on the currency markets. And traders might anyway wish to bear in mind that as Turkey imports all the oil needed to power its economy, the cost of that energy (which is priced in USD per barrel) only gets even more expensive in TRY terms as the TRY falls in value versus the USD. But, going into Thursday’s policy meeting, the consensus among economists polled by Bloomberg is that the CBoT will increase the one-week repo rate by 3 percent to 20.75 percent. Whether that proves enough for traders remains to be seen. But traders might conclude there is a material risk that if the CBoT, mindful of the slower pace of economic growth evidenced in the GDP data and that President Erdogan himself is no fan of higher interest rates, hikes by an amount that proves to be materially below market expectations, the TRY could come under renewed pressure.

by Neal Kimberley, External Currency Analyst.