The USDTRY appears to have found some relative stability over the summer.
The upcoming interest rate policy decision by the CBRT won’t shake things up too much. Although given their long-standing reputation for unconventional policies, we shouldn’t get too comfortable in assuming expectations will be met.
President Erdogan most recently continued to push his unorthodox view that lower rates will lead to less inflation. expecting rates to drop later in the year.
Unsurprisingly, this contradicts the views of economists.
In fact, experts’ latest survey showed a slight increase in projected annual inflation from 10.5% in the prior survey. That compares to the latest report showing inflation at 19.0% annual.
Meanwhile, Erdogan expects inflation to be at 7.0% by the end of the year.
There might be a chance for change
The level of autonomy of the CBRT is still debatable.
Erdogan has insisted that August is the “make or break” month for inflation. Should targets not be delivered, Governor Kavcioglu might find himself without a job.
So far, Ankara and the CBRT agree on the general direction, they just differ on the degree. Economists and Erdogan also agree that inflation will be lower by the end of the year, the President is just more optimistic than they are.
In any case, Turkey still has the highest interest rates in the world, even taking into account the worst inflation forecasts. However, capital flows remain muted, even as the rest of the world has unprecedented monetary easing.
The general outlook is that the Turkish economy will continue to improve. Therefore it is possible that the reserve bank will have an excuse in the future to cut rates.
In the meantime, the consensus of expectations is that there will be no rate change. There doesn’t appear to be any pricing in of a potential rate cut, so if it happens, we might see some substantial weakening of the lira.
Banxico to take action
The other competitor for the highest real rates in the world is Mexico.
With inflation well above target, Banxico has been struggling to keep on target as the central government increases spending to support the economy through the pandemic.
To make matters more difficult, the recent strength in the dollar due to expectations of the Fed’s taper has raised the prices for imported goods.
Although the peso has found some strength lately, the overall weakness in the currency has also proved to be a challenge for Banxico.
Generally, they would move rates in tandem with the Fed to maintain interest rate spread with Mexico’s largest trade partner. However, the pandemic has upended that consensus.
How high can we go?
For that reason, the consensus is that Banxico will raise rates by 0.25 basis points.
Money markets have already priced that move in. So, if they don’t deliver, we could see some weakness in the peso.
On the other hand, there is an expectation that after the raise, Banxico will take a pause to gauge the results.
So, if we get some hawkish rhetoric in the statement, or in the press conference afterward, then the peso could move higher.