Turning more bearish : We move from neutral to

TRY: Turning more bearish

We move from neutral to underweight TRY in our model portfolio, positioning for TRY underperformance to regional peers

As TRY approached 1.75 in recent weeks we moved from overweight to neutral in our GBI EM FX model portfolio (see TRY: no longer so bullish, Mike Trounce, 27-Jan-12), we now think the risks are skewed towards TRY underperformance relative to regional peers and move the currency to underweight.

· The narrowing of the interest rate corridor signals less official support for TRY at current levels · Recent macro data point to decreasing inflationary pressures which should begin to gradually ease concerns over the level of TRY · As Turkish portfolio inflows begin to slow relative to the start of the year, the still large (though adjusting) C/A deficit should begin to play a more important role in TRY price action.

· TRY is particularly sensitive to oil price increases relative to regional peers.

· The main risk to our view is a more severe deterioration in risk appetite which would likely prompt the re-initiation of the CBRT’s defense of TRY as the currency trades towards the CBRT’s sensitivity levels.