TRY: Restart of cutting cycle is here – Commerzbank

The Turkish central bank is likely to return to the cutting cycle today after tightening conditions in March and April. We expect a 250bp cut to 43.50% in line with market surveys. However, expectations are tilted towards a larger rate cut. At the same time, the CBT usually follows market expectations and likes to stay on the hawkish side to maintain TRY stability. Therefore, 250bp seems the safest to restart the cutting cycle that began late last year, ING’s FX analyst Frantisek Taborsky notes.

USD/TRY continues its gradual upward trajectory

"Although inflation expectations continue to decline gradually and inflation has seen some slowdown in recent months, the overall picture is not ideal for the central bank. The economy is visibly slowing down but inflation expectations for the end of this year remain well above the CBT forecast, close to 30%, which is also our forecast (29%). So today we will be closely monitoring the size of the rate cut, as it will reveal the central bank's willingness to consider further cuts. Additionally, the forward guidance provided will offer more insights. We expect another 250bp rate cuts this year with 35% by year-end."

"USD/TRY continues its gradual upward trajectory with the recent break of the 40.00 level, and not much will change here in the near term in our view, with 43.00 at the end of this year. The central bank has been allowing less carry for long TRY investors in recent months but at the same time seems to have FX fully under control, reducing the chance of any sudden USD/TRY moves to the upside. The market has also priced in more rate cuts and OIS and FX implieds have essentially returned to almost pre-March levels, making pricing less attractive here. Overall, TRY still offers a reliable source of safe carry, but the returns have understandably diminished as the CBT moves to normalise conditions."