The CBRT hike again and maintain their credibility. They will hike another 100bps in January.
By: Richard Russell
Tags: Trading, Turkey, Finance, Investing

Summary:

The CBRT hiked rates 200bps with the statement saying that tight monetary policy will be sustained until there is a permanent fall in inflation. I expect another 100bps hike on 21st January. Flows data showed both an increase in local FX deposits and a very large foreign investor inflow into TurkGBs of $1.66bn. The offshore FX swap market remains long cash, with funding trading in mid-single digits now. Given ample cash and high RWA charges the turn has the potential to go negative.

The CBRT hiked rates 200bps to 17% as the recent high inflation print (CPI 14.03% YoY and PPI 23.11% YoY) and building inflationary pressures have forced the bank’s hand. They will hike again on 21st January.

On Thursday the CBRT hiked the repo rate another 200bps to 17%, with the statement saying that the bank will continue to maintain a tight monetary policy stance in order to expedite the disinflationary process. This move will have won the bank a lot of credibility in international investors’ eyes. The move dispels fears that Erdogan had only given the green light for a minimal interest rate hike, and it now looks like the CBRT do have scope to continue to raise rates if necessary.

Inflationary pressures are building in Turkey, with the most recent inflationary prints showing a strong acceleration in inflationary pressures. In particular the PPI number (+23.11% YoY) should be particularly worrying to the CBRT as they look to get inflation under control, with the winter months exhibiting seasonally higher inflation. I expect to see CPI headed to 15–16% in Q1, with the next CPI print released on 4th January.

Turkish CPI in blue, PPI in white

Source: Bloomberg

Given these inflationary pressures and the desire to continue building credibility, I think the CBRT will hike rates 100bps at their next meeting on 21st January. The extra cost of hiking another 100bps in terms of lost economic output is likely low given all the other factors affecting Turkey’s economy (already high rates at 17%, coronavirus pandemic, unemployment etc.), whereas the potential extra credibility this would win in the eyes of international investors and local savers would be large.

Flow data for the week ended 18th December shows locals continuing to accumulate FX deposits after last week’s pause. The foreign investor flows data showed the biggest inflow to the TurkGB market since July 2017.

The week ended 18th December saw local savers add $2.6bn to their FX deposits, with the number ex-gold rising $2.3bn. This was after last week saw an increase of $320m. The CBRT still has a big task to convince local savers to switch their savings from FX and gold back to Turkish lira, with this being an objective the CBRT have been explicit about in their communications with the market. The Asset Ratio Rule is due to be removed on 31st December, with its removal allowing banks to take in deposits without rehypothecating them to loans, TurkGB purchases, or FX swaps with the CBRT. Once this rule is removed I expect to see local deposit rates head higher as banks will be free to make more commercially viable decisions with the deposits they hold.

Foreign investors were big buyers of Turkish assets last week, with the inflows into TurkGBs in particular standing out. Non-resident investors bought $1.662bn of TurkGBs, up from $99m the week before, and the largest weekly purchase amount since July 2017. Despite this, outflows from foreign investors this year still remain substantial, and the CBRT need to maintain their tight monetary policy stance in order to attract foreign investors back to Turkey. Any indication that the CBRT are returning to their former policy stance will lead to reinvigorated outflows.

Non-resident weekly flows into TurkGBs

Source: Bloomberg

Funding rates have fallen in the offshore FX swap market this week, with overnight funding trading down at 5% from 14% the week before. The turn was trading at a -800bps discount, however given ample liquidity combined with punitive RWA charges, I think this has room to go negative.

The offshore FX swap market has seen an inflow of TRY cash since Thursday last week, with o/n funding rates falling from 14% to 5% in six trading days. The front-end of the curve has also fallen, with the curve steepening on the back of this, and there have been some attractive carry opportunities in the very front-end of the forward/forward curve. Despite this, the 1yr point of the curve has remained relatively supported, with 1yr cross-currency yields at 15.4% looking attractive both versus other options available in the high-beta EMFX space and as a carry play. 1yr FX swap points of 11,600 give a per day FX points of 32, with funding trading around 10 points currently you pick up 22 points per day of carry just from the funding.

Year-end turn (31st Dec — 4th Jan) has also been trading, with the bulk of trading between 40–50 points for the 4 day run, implying ~800bps of discount. While this is substantial, I think this still has room to run. The quarter-end turn in September went negative, which I think should be viewed as the baseline for this turn. Further, given that liquidity in the offshore FX swap market appears ample at this point, the punitive RWA charges for holding TRY cash on balance sheet should lead to people looking to offload TRY cash over the turn, pushing the turn left.

The quarter-end turn went negative in September.