The Turkish lira is under selling pressures as the global market sentiment soured. USD-TRY finally has crossed the 1.60 barrier and vs. the basket the TRY weakened beyond 1.92. It is worth noting that foreigners’ appetite for Turkish assets has strongly deteriorated. According to Turkish central bank data, foreigners sold net USD 1.1bn of Turkish bonds (adjusted of prices and FX change) in week ending May 13. This is the largest weekly outflows since October 2008!! The 4-week accum flows have thus plummeted to -700mn vs. +1.7bn the week before, the largest outflow since mid-November.
We continue to believe that the TRY remains extremely vulnerable to changes in global market given Turkey’s huge current account deficit (8.0% of GDP) and dependence to short-term capital inflows. The central bank does not offer any attractive premium to the macroeconomic risks. The CBRT may again increase the RRR this week but a change in key policy rates appears still unlikely. As we have emphasised at several occasions, the risk of further and wide lira depreciation persists. In a note published beginning of March, we have said that USD-TRY at 1.70-75 and the basket reaching 2.00 could be a trigger for a change in monetary policy stance. We continue to believe in this scenario.
Murat Toprak
HSBC Global Research