The Turkish lira/yen is expected to remain range-bound between 3.24 and 3.35 yen from 25 August to 1 September. The expansion of sanctions against Iran and the course of the effective interest rate are cited as factors that will determine the pair’s upside and downside.
This week’s focus is the strengthening of U.S. sanctions against Iran and their impact on Turkish financial institutions, as well as the decline in effective interest rates following the TCMB’s resumption of repo auctions. The Treasury has announced plans to strengthen secondary sanctions, and the key concern is whether Turkish financial institutions will be among the targets. This could weigh on the lira, although concerns could also recede if Turkey demonstrates that it is disentangling itself from the parties concerned.
The TCMB resumed one-week repo auctions, supplying TRY 1 billion at an interest rate of 37%. Compared with the 40.06% rate when the operations were suspended in March, the effective interest-rate premium is beginning to come off, which is seen as a phase in which support from swap points is weakening. However, some interpret the return to normal funding operations as a sign that market conditions are stabilizing.
The Turkish lira/yen is expected to be affected via dollar/yen around the release of U.S. PCE data and a speech by Fed Chair Warsh. If U.S. interest rates move depending on the PCE data and comments from dovish or hawkish policymakers, yen weakness or strength could either support the lira or cap its upside. Some also believe, however, that excessive correlation is unlikely.