Week in FX Europe – Turkey’s Investment Upgrade A Plus for TRY?

Turkey this week caught the markets attention on two occasions, the first, after Moody’s upgraded Turkey’s sovereign bond ratings to investment grade (Baa3), in line with Fitch at BBB- and above S&P at BB+. The second time occurred after Turkey’s Central Bank extended its monetary easing cycle.

The rating upgrade has been a part of “consensus expectations for an extended period and was one of the main drivers of real money demand for Turkish bonds in the past 12-months.” Investors and dealers who do not normally take a look at this investment “name” have been sucked into consideration. Analysts note that “an outright increase in the reserve requirement ratios for the banks’ FX-denominated liabilities” late week introduced an element of tightening, which was not part of the last months mix.

The market is expecting their domestic currency the TRY to succumb to a positive near-term reaction to the most recent upgrade. However, the issue of “hot-money” flows (first appeared last November when Fitch rated Turkey investment grade) could leave the country vulnerable to economic and financial instability.

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