USD/TRY likely to trade above 3.25 in coming months

Turkey's headline inflation stays remarkably higher in spite of oil prices decline, due to the lower real interest rates. Headline inflation is above 8% with no indications of convergence towards the 5% target.

Led by a turn between the first and the second general elections in November, President Erdogan's footing is stronger now. He might push towards weakening the central bank's mandate and lower interest rates.

"We believe USD/TRY will trade above 3.25 in the coming months. The main drivers will likely be disregard of the inflation targeting regime and high levels of foreign liabilities", estimates RBC Capital Markets. 

Mehmet Simsek is now in charge of the fiscal policy. Babacan did give the cabinet a level of credibility it may lack going forward. It will be closely watched whether CBT Governor Basci is replaced.

Governor strongly announced concerns about reducing nominal rates while Erdogan took the other side on a noisy public debate back in February. A combination of a Fed hike and short term international claims at over three times FX reserves may push local corporates to buy USD/TRY.