Turkish Lira: Carry trade holds as easing cycle restarts – ING

A 100bp cut to 36.00% is expected by ING’s Frantisek Taborsky as the Central Bank of Turkey resumes monetary easing. He anticipates further 100bp reductions in October and December, taking rates to 35% by year-end. While inflation sentiment has improved and fund-related risks remain contained, he cautions that domestic demand is weakening. Long TRY positions remain crowded, but Taborsky expects the carry trade to continue and projects USD/TRY at 51.50 by year-end.

Turkey poised to resume rate cuts as carry retains appeal

"We expect the Central Bank of Turkey to resume its easing cycle for the first time since the US-Iran conflict began today, cutting rates by 100bp to 36.00%. September’s inflation data provided a positive signal, while developments in investment funds point to downside risks for the economy in the final quarter."

"However, it may further weaken domestic demand through tighter liquidity, wealth losses and lower confidence. Repayments to smaller investors could cushion consumption, but counterparty exposures remain the main spillover risk."

"Inflation sentiment has improved after benign September data and expectations of weaker demand. We expect 100bp cuts in October and December, taking the policy rate to 35% by year-end, versus our 29.0% inflation forecast for year-end."

"Although crowded long TRY positions offer less and less carry, they remain popular in emerging markets, and we expect this demand to persist in the coming months despite renewed rate cuts."

"The recent weekly adjustment in USD/TRY does not alter the overall FX setup, and the carry trade continues. We expect a level of 51.50 USD/TRY by the end of the year."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor. Know more.)