TRY: Range-bound for the next couple of months – Nomura

The research team at Nomura expects the Turkish lira to trade range-bound for next couple of months as with the recent referendum resulting in a narrow win for YES, Nomura do not expect the AKP to call for early elections over the next few months. As a result domestic political risk may subside somewhat. 

Key Quotes

“With Nomura Economics expecting inflation to moderate only very gradually after peaking in April, and with TRY REER at or close to historical lows, the TCMB will likely be allowed to maintain liquidity tight over the next three months. At the same time, a more pronounced TRY rally to 3.55-3.60 is likely to see the TCMB easing policy by guiding the average cost of funding lower within the existing corridor.”

“A period of stabilisation in USD/TRY would also be consistent with the historical pattern, which shows that sharp sell-offs in the Lira are followed by TCMB tightening and a period of TRY stabilisation. On average these periods of a largely stable lira have lasted for 9-15 months, suggesting a rangebound TRY going forward.”

“While not high in absolute terms, TRY vols are relatively high and up by around 2 vols looking back over the past five to six months since the US elections. This compares with BRL, MXN, RUB and ZAR vols, which are down by 2-4 vols over that same period.”