USD/TRY: Substantial rates hike needed to prevent further lira depreciation – TDS

The lira has been the worst performing major EM currency in August. TRY has already weakened by over 4% against the USD, with USD/TRY today hitting an all-time high of 7.2850. Izidor Flajsman, from TD Securities, thinks the CBRT needs to hike rate dramatically to avoid  further lira depreciation. 

Key quotes

“We've consistently stated that monetary policy in Turkey is too loose and the CBRT will have to hike rates dramatically. In April, we pointed out that the CBRT had taken net reserves to zero and would likely deplete other liquidity buffers in Q3, with hikes needed by September. At this point, policymakers will have to hike significantly, and possibly introduce capital controls.” 

“Last week, we stated that the pace of reserve burn YTD would match the CBRT's reported gross reserves (mostly borrowed) by late summer/early autumn unless alternative funds are found or FX interventions halted.” 

“While higher US rates could take some near-term pressure off TRY, unless we see a sharp improvement in sentiment with renewed capital inflows, we think the CBRT will have to hike rates and continue to look for at least 200bps of tightening by end-Sep, with further tightening beyond that.”