Market participants will likely take some time to consider the global impact of Saturday’s headline relating to the dismissal of Turkish
Central Bank Governor Murat Cetinkaya, in office since April 2016. The constructive discussions at the G20 summit between Turkish
President Tayyip Erdogan and US President Donald Trump had given Turkish lira a relief for the past few weeks. Yet the trend is likely to
reverse as the timing for a change in Turkish Central Bank (TCMB) forward guidance is worst amid a significant loss of TRY carry
advantage and a stronger dollar as expectations of Fed rate cuts is on the sideline following upbeat labor data.
Investors are therefore questioning again the independence of the TCMB, which cost TRY a major depreciation against major currencies (USD/TRY:
+40%) last year and put pressures on the Turkish banking sector. This scenario could well recur as a quick U-turn of monetary policy
towards rate cuts at its next monetary policy committee on 25 July 2019 will likely corroborate the statement and put upward pressures
on Turkey’s inflation. Furthermore, the June assessment made by Moody’s on Turkey’s sovereign credit, whose credit rating has been
cut deeper into junk territory (from Ba3 to B1), and a group of 18 banks among which two state-owned banks Ziraat Bank and Vakifbank have
been notified as having deteriorating credit profiles, confirms the vulnerability of Turkish financial sector to extreme monetary
policy measures. A sustained rally in USD/TRY is therefore expected looking forward.
USD/TRY is currently trading at 5.7260, bouncing from 5.5967 (04/07/2019 low) 2-months low and heading along 5.80 short-term.
By
Vincent Mivelaz
