(Bloomberg) -- A dovish message from Mario Draghi will be balm to traders if Turkey lowers rates by more than expected.
The European Central Bank president's address is due less than two hours after the Turkish policy decision and could give the rampant hunt for yield another boost. Market pricing suggests investors will digest a cut as deep as 350 basis points, maybe more, even though the median estimate in a Bloomberg survey is for a 275 basis-point reduction.
In July, when Governor Murat Uysal delivered a record 425 basis-point cut, Draghi's policy message proved key in capping the currency's losses. The lira initially fell sharply before swinging to gains, ending the day almost 1% stronger. Cristian Maggio, the head of emerging-market strategy at TD Securities in London, expects a similar pattern today.
And it's not just the prospect of looser policy working in favor of the lira. Inflation is very likely to drop more than 500 basis points through October, protecting one of the juiciest real rates on offer in emerging markets, even as the central bank lowers borrowing costs. Turkey's policy rate adjust for consumer price growth stands at over 400 basis points, double the average of its peers, according to Bank of America Corp.
“The favorable inflation outlook supports aggressive moves for now,” Maggio said. “In fact, it looks more likely that the market response, net of the first kneejerk, could be neutral-to-positive.”
Read More: Turkey Can Go Big on Rate Cut Without Erdogan's Iconoclast Nudge
Read More: Traders Pin Hopes on Draghi for the Next Leg of EM's Bond Rally
To contact the reporter on this story: Constantine Courcoulas in Istanbul at ccourcoulas1@bloomberg.net
To contact the editors responsible for this story: Dana El Baltaji at delbaltaji@bloomberg.net, ;Onur Ant at oant@bloomberg.net, Marton Eder
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