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You Only Live Twice

25 October 2018 by jbchevrel

Turkey 5y CDS got tighter another c10bp today, bringing the rally since the end of August to 170bp, on the 5y CDS. In the same time, $TRY got down c15%. The two key developments which have helped that reversal were 1/ the Sept 13 CBRT rate hike to 24% (nominal…) and 2/ the freeing of the Pastor Brunson, the cornerstone of the US-Turkey diplomatic relationships. Given short positioning, the path of least pain was for Turkish assets to rally, after those two developments. Today the CBRT stood pat on rates, as widely expected by both economists and the short end. The market prices nothing for the next three months and then less than 300bp of hikes for the twelve following months. Given how close to zero TRY rates are, given its trade deficits, and given its political leadership, Turkey remains seen as vulnerable in the medium term. And the CBRT might need to hike more aggressively than the markets currently price in, to reward adequately TRY holders for the risk they take.