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Some colour out of Turkey
Moody’s warned that Turkey could lose its investment grade rating due to high political risks. The rating agency also highlighted the risks of accelerated capital outflows and a rapid decline in currency reserves. In the worst case scenario, Turkey could also face a crisis in its balance of payments, according to Moody’s analysts. S&P and Fitch also warned of a potential deterioration in Turkey’s sovereign rating pointing at a potential divergence in political opinions and the fragile base regarding the institutional independence.

As concerns regarding the institutional independence are heating up, the Central Bank of Turkey’s (CBT) rate decision will be in focus. The CBT is expected to cut the overnight lending rate by 25 basis points, versus 50 basis points presumed before Friday’s coup attempt.

The sovereign yield curve surged by 75 basis points on the front-end, and by 100 basis points over 10 year maturity, suggesting that a smaller rate cut in the upper corridor could trigger a short-term rally in the lira, nevertheless the upside is expected to remain limited.

Lower policy rates could be perceived as a mispricing in Turkey’s risk-to-return ratio given the upside shift in sovereign rates. Therefore, the market is expected to remain on the sell side in the lira market. The USDTRY is an interesting buy-the-dip to strengthen the short lira exposure in light of fundamental, political and financial risks.