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CEMEA High-Beta Risk Premia: CBRT Credibility Deficit Keeping Premia Elevated in USD/TRY

EMERGING MARKETS
  • USD/TRY 5y CDS +30% YTD, vs +8.1% in Russia & -4.5% in SA: reflecting the importance of idiosyncratic risks and local stories in delivering FX outperformance in 2021
  • Embedded risk premia still remain acute in USD/TRY, given the 5Y CDS has yet to pare the topside breakout gap brought on by Ex-CBRT Governor Agbal's snap removal in March
  • CBRT remains in a credibility deficit, with markets expecting a return to premature rate cuts to satiate Erdogan's desire for single-digit rates.
  • By contrast, Russia has pared the majority of its US sanctions-induced move higher as Russia-Ukraine tensions dissipated rapidly into the start of April.
  • Narrow scope of US sanctions and broader dampener mechanisms in the Russian markets (lower foreign OFZ holdings <20%, strong FX reserve position, lower USD debt, Undervalued RUB & CBR OFZ liquidity support) aided in limiting the fallout.
  • With tensions cooling into the June Putin-Biden Summit, the direction of travel in Russia's CDS remains lower – with the US showing little appetite for escalating tensions with Russia.
  • in SA Improving fiscal, current account & political dynamics have aided in risk premia compression and outperformance relative to peers Russia & Turkey.


MNI London Bureau | +44 020-3983-7894 | murray.nichol@marketnews.com
MNI London Bureau | +44 020-3983-7894 | murray.nichol@marketnews.com

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