Forex Flash: CBRT controversial with today's rate cut, TRY unattractive – Forex Flash

The CBRT was controversial by deciding to cut the overnight lending and borrowing rate by 25bp to 8.50% and 4.50%, respectively, and leaving the benchmark repo rate unchanged at 5.50%. “Implications have been immediately negative for the lira, given the broadly long positioning of the market, and the MPC implicitly reinstating the message that lira strength will be fought back when TRY REER exceeds the 120 threshold”, wrote TD Securities analyst Cristian Maggio. “The CBRT also hiked the TRY and FX RRRs to a slightly less aggressive extent than we had forecast. The overall effect is a softer policy mix that has induced minor downside corrections in rates as well”, Maggio added.

TD Securities analysts believe the biggest risk for USD/TRY shorts is the implicit message from the CBRT: "By standing against TRY appreciation, the MPC will continue to make long TRY trades unattractive, while draining liquidity with higher RRRs". "In this respect, we continue to believe that the market is not properly priced for these risks and we prefer to hold onto our forecast of 1.80 in Q1, 1.78 in Q3 and 1.79 in Q4", wrote Maggio, pointing to more chances of a stronger lira only with a sharp economic rebound, domestically and globally. In terms of REER, our realtime tracking shows a reading of 120.9, so still above 120, which suggest further moves to weaken the lira are likely in the upcoming periods", Maggio concluded.