TRY: Lira Hits New All-Time Low for Seventh Consecutive Session

USD/TRY has traded to a fresh record high for the seventh consecutive session, up 0.1% today and 2.5% higher on the year so far. Nevertheless, TRY remains attractive from a carry point of view given the CBRT’s so-called real appreciation strategy, which aims to keep the rate of TRY depreciation below the rate of inflation. “You could bank on real exchange-rate appreciation lasting as long as the program delivers,” Mehmet Simsek said earlier in the month.

• Risks to the carry trade stem predominantly from uncertainty over the CBRT’s rate path. Official comms continue to reiterate that future rate decision will be made in a data dependent, meeting-by-meeting approach, while Governor Fatih Karahan said over the weekend that policymakers are in a “very gradual” rate-cutting cycle.
• Turkey’s monthly inflation rate accelerated to 5% in January while the annual rate eased to around 42% - both of which were above market expectations. Still, it appears likely that monetary authorities will be able to replicate the 250bp rate cuts delivered in the previous two meetings when they convene next on Mar 6 given that a one-week repo rate of 42.5% would mean real rates remain positive.
• More predictable monetary policy has contributed to the ongoing turn lower in short-term lira volatility, with 1-month vols currently showing close to levels not seen since March last year, and as the CBRT progresses through its easing cycle, eventual carry deterioration from a rates perspective will place greater significance on FX stability moving forward. Indeed, Simsek has said the goal is to draw in longer-term investments as opposed to hot money flows which risk prompting currency volatility.