‘Unfortunately, He Isn’t Going Anywhere’: After Worst Week Since Crisis, Lira Surges On Central Bank Announcement

I’m pretty biased towards Bloomberg’s cadre of live bloggers because frankly, they provide an invaluable, 24-7 service to professional investors and what they write between them is a real-time, wellspring of idea generation for macro addicts. But I’ll confess I’m not sure BBG’s Benjamin Dow is correct on Monday to say “the Turkish central bank keeps on winning.”

If there were such a thing as Turkish monetary policy Twitter, I don’t think “#Winning” would be something tweeps would employ very often. Rather, I think “#Sad” would be the most used tag.

On Monday, the above-mentioned Benjamin Dow discusses CBT’s imminent move to simplify monetary policy by going back to the 1-week repo rate, which they effectively ditched 15 months ago. According to sources who heard Cetinkaya discuss the move at a Ramadan dinner, the change was set to go into effect at the closely watched June 7 meeting. Eventually, the market got the official word from CBT and the changes will in fact go into effect on June 1:

The CBRT has decided to complete the simplification process regarding the operational framework of the monetary policy.

Accordingly,

• One-week repo rate will be the policy rate of the Central Bank. This rate will be equal to the current funding rate (16.50%).
• Central Bank overnight borrowing and lending rates will be determined at 150 basis points below/above the one-week repo rate.
• The new operational framework will take effect on 1 June 2018.
• Technical details will be announced.

This of course comes on the heels of last week’s 300bps LLW hike which itself came less than a month after a 75bps hike failed to arrest the slide in one of the world’s worst performing EM currencies YTD.

Apparently, LLW will be 19.5% starting on June 1, which amounts to another 300bps hike (last week’s emergency move took it to 16.5%).

Ok, so all of that ignited a furious rally in the currency. At one point, the lira was stronger by some 3.5%, the best day since early November 2015. And while it’s trimmed some of that, it’s still stronger by the most since early last year.

While that’s great, it’s important to keep perspective. Here’s what Monday’s rally looks like in the context of the last several sessions which include the chaos in TRYJPY last Wednesday, the panic lows hit hours later and the emergency LLW hike:

Again, I’m not sure “keeps on winning” is the best description here. Monday’s news merely managed to get the lira back to the knee-jerk levels seen after last week’s panic move by CBT, although clearly, the simplification of the rates regime is a much more consequential step than the emergency hike.

Here’s BlueBay Asset Management’s Timothy Ash, who last week noted that the CBT’s credibility is “shot to hell”:

Actually from June 1. The CBRT will hope the market stabilises after this move and the 300bps rate hike last week, and hence no need for another rate hike at the MPC meeting on June 7. Let’s see the May CPI first, which could be ugly. https://t.co/urMEvMngW1

— Timothy Ash (@tashecon) May 28, 2018

Market confidence was so terribly beaten down after Erdogan’s disastrous comments to investors in London that the CBRT will have to work really hard to regain credibility – might still have to hike on June 7. https://t.co/0aFjyDjsgW

— Timothy Ash (@tashecon) May 28, 2018

Monday was a small victory of CBT, but as discussed at length here over the weekend in “‘Thwarting This Game Together’: Of Burnt Turkey, Emerging Markets And Dollars Under Pillows“, the fundamental backdrop for Turkey is unchanged as is the root of the problem: Erdogan.

And see that gets back to the crux of the issue. Be careful about suggesting that today’s news represents a restoration of central bank independence. Erdogan does whatever Erdogan thinks is most expedient. He didn’t just wake up on Monday and decide to be sensible when it comes to rates.

We’ll give the last word to BBG’s Benjamin Dow who, despite the “winning” characterization, undoubtedly understands that at the end of the day, only one thing matters:

Unfortunately for Cetinkaya’s team, Erdogan isn’t going anywhere.