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

The TRY carry trade is likely to retain its appeal despite crowded long positions, according to ING’s Frantisek Taborsky, who projects USD/TRY at 51.50 by year-end. He expects the Central Bank of Turkey to restart monetary easing with a 100bp rate cut to 36.00%, followed by further 100bp reductions in October and December, taking rates to 35% by year-end. While highlighting better inflation sentiment and contained risks linked to funds, Taborsky cautions that domestic demand could weaken.

Can Turkish carry retain its appeal as rate cuts resume?

"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.)