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FX debt burden: The large share of foreign currency debt – in particular in the private sector – entails potential risks for the Turkish economy. Companies that hold debt in EUR or USD but whose revenue is TRY denominated have a problem. Their debt levels denominated in USD (or EUR) have risen by 65% (62%) in local currency since the start of the year, while nominal income has “only” risen by 12.3% (approximated based on CPI).
The longer the TRY exchange rates remain more or less stable, the further the gap between TRY depreciation so far and domestic price developments is reduced - and the smaller the burden of the companies holding foreign currency denominated debt becomes.
Unlikely fiscal policy:Minister of Finance Berat Albayrak announced support for the banking sector in view of the expected wave of payment defaults. That is good for the lira, as a wave of bankruptcies / a banking crisis would make it even more difficult for the central bank to pursue an active policy in the fight against inflation than it already is in view of President Recep Tayyip Erdogan’s interference into the central bank’s affairs.
Albayrak seems to be well aware of the fact that these are not times for an expansionary fiscal policy.
Momentary relief from CBRT monetary policy:Although the CBRT sent a credible message, more policy steps are required. CBRT surprised all market expectations by hiking rates by 625bps at its latest policy meeting. This should help stabilize the currency in the short-run.
While we hold off moving UW with the CBRT surprising once again. The aggressive tightening cumulatively delivered since April 25thwhich is supportive for the currency in the first instance, however, we see a portion of it as merely “catching up”, with inflation accelerating.
Trade tips:At spot reference: 6.2702 levels, contemplating above driving factors, on hedging grounds we initiate some options trades - 3m USDTRY put up-and-in Short 1m put.
Currency Strength Index:FxWirePro's hourly USD spot index has shown -18 (which is mildly bearish), while articulating at 12:24 GMT.
For more details on the index, please refer below weblink:
