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.
teb
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