The recent Turkish lira development appears quite surprising considering the latest rate cut implemented by the Turkish
Central Bank earlier in October following the removal of US tariffs imports as it trades at four-week low. Yet despite the sharp decline of
inflation data towards single digit due to a high base of comparison, a reversal towards double digits is conceivable amid deeper interest
rate cuts on 12 December 2019.

The decision made by US authorities to remove sanctions on Turkey after Russian and Turkish powers finally agreed on a safe zone in
Northeast Syria finally took the ascendant over the CBT announcement to cut its one-Week Repo Rate by an additional 250 basis points (-10%
year-to-date) to 14%, citing an improving inflation outlook. There is also good reason to think that the CBT swap operations policy tool on
the Istanbul stock exchange, which consists of a supply of lira for dollars, estimated in billions, confirms the limited room of maneuver of
the institution and raises questions on its available foreign currency reserves to support its currency. In addition, although headline
and core inflation gauges falling to 8.55% (before 9.26%) and 6.67% (before 7.54%) respectively in October tend to support the idea that an
inflation target of 5% is reachable, we expect the figure to return to double digits, given the reversal of base effects data from November
and December of last year. The latter would ultimately limit the CBT forward guidance rhetoric in the event of further aggressive rate
reductions. As a result, we expect the CBT dovishness to weigh further on the Turkish lira as the Syrian conflict eases. We maintain a bearish
view on TRY looking forward.

By Vincent Mivelaz

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