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 month's 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.