The lira drew out a modest recovery on Friday after the central bank came up with additional actions to tighten liquidity in the banking system. In the past two days, CBT has canceled its normal one-week repo funding for banks (which it provides at the 8% policy interest rate). This had the effect of forcing banks to borrow from the more costly overnight facility at 8.5% interest rate.
On Friday, CBT also put a cap on the maximum amount a bank can borrow from it. If banks need funds badly, there is a late borrowing window, from which they can still borrow unlimited amount at 10% interest rate.
Such measures tantamount to a rate hike, but in an indirect way, using quantitative tools. Will these be sufficient to stop lira depreciation? We don’t think so. This indirect manner of tightening has been used ever since 2011 when the rate corridor was announced precisely so that the Turkish central bank could tighten without actually raising rates.
But this method never proved effective in combatting lira depreciation precisely because the central bank was never giving a strong, unambiguous signal to the market. Because of its ineffectiveness, CBT decided to disband this framework and shift to a unified policy interest rate. But now the new MPC is back to using the same old tricks. Once again, this manner of tightening will have only weak results, because the tightening is clearly temporary and will be reversed as soon as the lira stabilizes and using such measures only highlights the political pressure CBT works under.
We expect pressure on the lira to return after a brief pause.
We’ve been constantly maintaining our long portfolios in USDTRY, please follow below weblinks for our previous write-ups on the bullish perspectives,
The above trades in our write ups have fetched the descent returns, rest is history. For now, as more bullish rout is on cards, we still uphold USDTRY 1x1 call spread with conviction (3.55, 3.8250), spot ref: 3.7753.