What’s the takeaway from TCMB’s action?

New governor, Murat Cetinkaya, of Turkey’s central bank, known as TCMB introduced rate cut as an inaugural move to monetary policies. It has now reduced monetary policy for second consecutive month to 10% from 10.5%. Turkey has held interest rates steady, despite higher inflation in order to prevent its currency from sliding against Dollar and to boost domestic growth. Since 2014 to early this year, Turkish Lira has depreciated around 50% against Dollar.

However, reaction after TCMB’s rate reduction, that depreciating trend is on the reverse, at least for now. Despite the cut Lira was up and trading around 2.8 per Dollar.

Why did that happen, especially when yield difference is falling by as much as 50 basis points?

• Firstly risk-perception towards emerging market currencies seem to have changed and many are included in this year’s best performer list.

• Throughout 2013/14 weakness in USD/TRY was being driven by fundamental weakness in Turkish economy, now the pair is driven more by Dollar weakness and Dollar has been broadly weaker.

• Due to large drop in currencies and capital market, investors are finding values in emerging market leading to large capital inflow.

Now, Lira’s appreciation after TCMB action shows, there may be more juice left and EM assets can rally further.