Citi Advises Turkish Lira as Central Bank Indicates Significant Interest Rate Reduction
In a surprising move, the US-based investment bank, Citi, has reclassified the Turkish lira as "overweight" in its model portfolio, despite anticipating a significant policy rate cut by the Turkish central bank's Monetary Policy Committee meeting on Thursday.
This reclassification comes amidst a recovery in Turkey's total reserves, which have risen to $166.2 billion in the week ending July 11. This is a notable increase from the reserves falling below $140 billion by May 2, with net reserves excluding currency swaps at $13.8 billion.
However, Citi's stance on the Turkish lira seems to be more nuanced. While the bank has reclassified the lira as "overweight," it also holds a three-month forward short position on the U.S. dollar against the Turkish lira. This suggests that Citi may be expecting the lira to depreciate against the dollar in the short term.
The bullish stance on the Turkish lira could be influenced by several factors. Successful economic reforms, political stability, and positive economic indicators could all contribute to a more favourable outlook for the lira. For instance, the implementation of reforms that improve the business environment and attract foreign investment, a stable political climate that enhances investor confidence, and interest rate decisions by the central bank that support the currency are all potential drivers for optimism.
Recent developments in Turkey, such as the accumulation of foreign exchange reserves by the central bank, may also play a role. This marks a halt in the trend of reserve depletion that Turkey has been experiencing.
It's important to note that Citi has also issued positive guidance for Poland's 10-year local bonds and Egypt's three-month treasury bills, indicating a broader tilt toward emerging market assets with improved fiscal dynamics.
However, the Turkish lira faced a significant downturn in March 2025 due to political instability, which led investors to be cautious about Turkish assets. This political instability, coupled with the anticipated policy rate cut, could potentially counteract the positive factors influencing Citi's reclassification of the lira.
The euro, British pound, and U.S. dollar were trading at 47.4739, 54.8045, and 40.4539 against the Turkish lira, respectively, as of 1:40 p.m. GMT on July 23.
Other factors affecting Turkey's economic landscape include increasing tension in Turkey's patience in Syria, the Lebanonization debate causing intense controversy, and over 35 foreign e-SIM providers being blocked in Turkey.
In a prior note from November 2024, Omar Hafeez, Citi's head of North Africa, the Levant, and Central Asia, warned that large-scale portfolio inflows into Turkey remained subdued due to the perceived relative strength of the lira. This suggests that despite the current bullish stance, there may still be lingering concerns about the lira's value.
Turkey also unveiled the first hypersonic missile, Tayfun Block 4, at IDEF 2025, a significant milestone in the country's military capabilities.
As the situation in Turkey continues to evolve, investors will be closely watching the Monetary Policy Committee meeting on Thursday to see if the anticipated rate cut will materialize and how it might impact the Turkish lira.
- Despite Citi's reclassification of the Turkish lira as "overweight," they have also taken a three-month forward short position on the U.S. dollar against the Turkish lira, suggesting they expect the lira to depreciate against the dollar in the short term.
- The Turkish lira's reclassification by Citi could be driven by successful economic reforms, political stability, and positive economic indicators, creating a more favorable outlook for the lira.
- Omar Hafeez, Citi's head of North Africa, the Levant, and Central Asia, warned in a prior note that large-scale portfolio inflows into Turkey remained subdued due to the perceived relative strength of the lira, suggesting that despite the current bullish stance, there may still be lingering concerns about the lira's value.
- Other factors affecting Turkey's economic landscape include increasing tension in Turkey's patience in Syria, the Lebanonization debate causing controversy, and over 35 foreign e-SIM providers being blocked in Turkey, which might influence foreign investors' decisions regarding Turkish assets.
