USD/TRY: An emergency rate hike is required to dent the bullish momentum – Rabobank

The Turkish lira is one of the most sensitive currencies to the US election as a Biden victory may finally prompt the CBRT to hold an emergency meeting in the coming days and raise the 1-week repo rate by at least 500bps to stem the lira’s rout, economists at Rabobank apprise.  

Key quotes

“Biden is expected to be tougher on Turkey and insist on penalising Ankara for purchasing the S-400 air defence system from Russia. Despite the US State Department reportedly recommending to impose sanctions on Turkey over the S-400s, President Trump refrained from doing so. If Trump is not re-elected, Turkey will lose its key ally in Washington and USD/TRY is likely to extend its already substantial gains further. 

“Perhaps Biden’s victory will finally prompt the CBRT to hold an emergency meeting in the coming days and raise the 1-week repo rate by at least 500bps to stem the lira’s rout. An outright hike is urgently required to stabilise the lira and prevent even more damage to inflation and the real economy.” 

“As the parabolic move higher in USD/TRY continues, the risk of a sharp correction also increases. The most powerful trigger to cause a short-term corrective pullback in USD/TRY from seriously stretched levels would be Trump’s victory and an emergency rate hike on Wednesday, but this scenario seems unlikely based on opinion polls and the persistent reluctance of the CBRT to act.” 

“In order to stabilise the lira the CBRT will have to raise the policy rate much more than it would have been the case if it had not disappointed the market by keeping the 1-week repo rate unchanged on October 22. Anything less than 500bps may not prove sufficient given the scale of the sell-off. The CBRT may have to do even more if Biden is elected. A response from the Erdogan administration to Biden’s victory would be crucial as well. Any attempt to reach out to Biden’s team and prevent tensions from escalating would ease market concerns about the risk of sanctions and would make an emergency rate hike far more efficient.”