Stay long, m nd US rates

Recent announcements on nonmm grant v sas by the US and Turk sh governments, coupled w th Turk sh m l tary ntervent on n Syr a, have been we gh ng on the l ra. Wh le t s st ll too early to pred ct the next phase n US-Turkey relat ons, we bel eve the key th ng to watch s the stance adopted n statements at the h ghest level on both s des. The strong t es between the two countr es suggest that cooperat on w ll cont nue. The monetary pol cy framework s stronger than t was at end-2016/early-2017 to support the l ra. The effect ve fund ng rate (EFR) rema ns at 12%. The Central Bank of Turkey cont nues to manage fore gn exchange l qu d ty towards FX swaps. Its recent statement suggests t does not see FX pressures on the l ra. The strong move br ngs the l ra to attract ve levels, but US rates clearly rema n a short-term r sk, espec ally as US 10-year fl rt w th 2.40. The l ra has been the underperformer n emerg ng markets over the past two years and current levels are close to ts current-account-based equ l br um (3.70), accord ng to our Compass model. The v olent react on to the tens on w th the US s a by-product of long pos t on ng and US rates momentum, n our v ew. As the pos t on ng cleans up, value w ll emerge versus peers l ke South Afr ca. Local b ds and a hawk sh central bank are l kely to prov de support f the sell-off sp rals further.

(Oct. 9)