24 Kasım 2016 Perşembe

Morning Meeting Notes Turkey - 24 November 2016

ON rate hike would be a surprise

The CBRT will hold its monthly MPC meeting today and the announcement will be at 11:30 GMT. We expect the CBRT to hike the 1-week repo rate by 25bp to 7.75% but keep the ON lending rate at 8.25%. This would make the interest rate corridor symmetrical around the  1-week repo rate, as the ON lending rate would be 50bp above and ON borrowing rate 50bp below this rate. We think such a move would put additional depreciation pressure on the currency.
CBRT can add other non-conventional tools to the policy mix as well, such as selling FX in daily auctions. However, the CBRT has little room to sell FX, in our view, bearing in mind that gross FX reserves will decline by USD 5.5bn to USD 117.5bn on the week ending 18 November, according to our estimations. However, the CBRT buys about USD 1.2bn monthly from exporters through rediscount loans (it bought a total of USD 12.2bn in the first 10 months of this year) and we think this is the maximum amount it can sacrifice, which is equivalent to  USD 50mn daily FX sales. Note that the CBRT still announces on a daily basis that it will not sell dollars in the FX auction the following day, thus keeping the option for intervention alive. Yet another option is to lower the limit on FX depos that are accepted as collateral to TRY repo operations. CBRT indeed took a similar measure on 10 November but the new limit is still four times the limits allocated before 17 July. This led 1m forward implied yield to increase to 9.0% recently. (Chart 1) So they can lower this limit further, which would cause short-term swap rates on TRY to increase even further above CBRT’s ON lending rate at 8.25%. Since this would increase the carry on TRY, it would give some support to the TRY.

Another option to tighten TRY liquidity conditions further and raise the average repo funding cost increase further from current 7.91%, which is already up by 10bp from last week. We don’t think this would have any material positive impact on the currency.
More significant sell-off in rates
After underperforming a basket of 16 EM currencies by 6.0% since last MPC meeting on 20 October, TRY remained relatively stable yesterday, outperforming by a mere 0.2%. However, this is hardly positive news, as rates underperformed more significantly, suggesting that investors are unwinding their FX hedges and selling assets.
10y bond yield rose to 11.4%, at its previous peaks attained in March 2014 and January 2016. It’s increase since last MPC meeting is 140bp. Some of this increase is related with global factors, as real interest rate on 10y US treasury bond increased by 34bp in the same period. Other factors explaining the increase is 42bp rise in Turkey’s 5y CDS spread and 26bp increase in survey based inflation expectations. We think all these factors explain 110bp of the total increase in 10y bond yield, taking fair value to 10.8% So 10y bond yield moved to oversold territory for the first time since the beginning of 2014 after the price move yesterday, according to our calculations. However, a reversal of this underperformance will depend on a prominent action from the CBRT today.    
Data agenda today

Today, CBRT will announce the weekly data on portfolio flows and FX reserves for the week ending 18 November. We mentioned yesterday that we expect gross FX reserves to decline by USD 5.5bn to USD 117.5bn, related with FX depos. Also CBRT will announce November capacity utilization rate and Real Sector Confidence Index. Separately, EU Parliament will vote to freeze accession talks with Turkey today, although the decision is not of a binding nature.     


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