(03 SEPTEMBER 2018)DAILY MARKET BRIEF 2:Further acceleration in Turkish inflation

Fears of contagion related to the Turkish banking system continues to spread, pushing the Turkish lira downward as inflation continues to grow at a higher pace than expected. Further bearish move on the TRY is expected as long as no obvious intervention from the Turkish Central Bank is communicated and implemented.

For now, August CPI data are given at a higher rate than what market participants would have expected. Annual and monthly figures are given at +17.90% and +2.30% (consensus: +17.60% and +1.84%), its highest rate in 15 years and this is certainly not going to stop for now, as inflation could reach as much as 25% by the end of 2018, thus remaining far from actual 5% target set by the Turkish Central Bank. Accordingly, with weaker domestic demand and economic confidence (at 9-years low) along with a drastic slowdown in industrial production, Turkey’s GDP growth is expected to slowdown in Q3 while given along 7% in Q2.

Further weakness in Turkish lira until next TCMB MPC is anticipated. Recent announcements from the central bank hints towards a policy adjustment during its meeting in 13. September next week. However, if the response is not perceived as appropriate, the Turkish lira will continue losing ground.

USD/TRY overshot the 6.50 range last week and currently trades along 6.62, approaching the 6.75 range in the short-term.

By Vincent Mivelaz