Post-referendum rally in Turkish lira seen as likely

A 'Yes' victory in Turkey’s April 16 constitutional referendum will likely boost the Turkish lira, said a senior financial analyst Wednesday.

Timothy Ash, a senior emerging market strategist at London-based BlueBay Asset Management, said a Yes victory would likely support the lira against foreign currencies and push Turkey’s Central Bank to sharply reduce its key rates.

“If the outcome of the referendum on the 16th is market friendly, I think the currency could strengthen and probably we would see the Central Bank cutting rates aggressively in that environment,” Ash said.

Saying that 2016 was a tough year for the Turkish economy, Ash added that inflation and the pass-through effect of the depreciating lira on inflation has been high due to the weak currency.

“This year is probably when inflation would be coming down,” he said, adding that a Yes victory would be seen as a better choice for moderation in the markets and positive for the lira.

“It’s possible to see inflation to peak in April-May, and then reduce. Still it will be around 8-9 percent by the end of the year. But it will be slightly better,” he said.

Saying his base scenario for the referendum is a Yes victory, as President Recep Tayyip Erdogan -- who favors Yes -- has many times proved himself in election campaigns, Ash said this will let the ruling Justice and Development (AK) Party “return to what it knows best, which is business.”

“If there is a Yes vote, I think the markets hope that there will be moderation and normalization in domestic politics and we will see the Turkish lira strengthen. If it strengthens, we should give some space to the Central Bank of Turkey to cut some interest rates,” Ash said.

But he warned that a possible No victory could lead to a negative market reaction and political uncertainty.

“I guess initial market reaction would be negative; it would assume continued political instability. The consensus is that a No vote means early parliamentary elections,” he said.