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Hard to Argue With the CBT
As before, the macro is not exactly going in the right direction for FX stability in Turkey. We want to see real adjustment in the form of demand contraction, fiscal austerity, slowing money and credit growth and falling inflation, but that's not what the numbers show today. Demand is still very strong, the external balance is worsening, budget deficits are widening and money and inflation are "stuck" in the 35% to 40% y/y range.
On the other hand the CBT is responding properly, by abandoning its easing cycle and hiking rates again over the past month. As a result the pace of lira depreciation has stabilized and the carry trade has continued to pay highly positive returns.
Summing up, there's plenty of underlying risk here, too much for us to be in longer fixed income or equity positions. But with sky-high front end rates and no hasty easing momentum we remain in TRY carry for the time being, while keeping an eye on the numbers.
Hard to Argue With the CBT (PDF)
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