How Far can the Turkish Lira Fall ask Analysts Amidst Fresh All-time Lows against the Pound, Dollar and Euro

- TRY in fresh meltdown in wake of central bank decision
- USD/TRY could hit 9.0 says Commerzbank
- But forecasting TRY in current market 'nonsensical'

Above: Turkish President Erdogan. Image © G20 Argentina

• GBP/TRY spot at time of publication: 10.71
• Bank transfer rates (indicative guide): 8.50-9.10
• Transfer specialist rates (indicative): 9.50-10.00
• More information on specialist rates, here

The Pound and other major currencies reached fresh all-time highs against the embattled Turkish Lira, which continues to shed value against all its peers in light of a growing political crisis centred between Turkey's government and the European Union and a failure by the country's central bank to take necessary steps to support the currency.

The Pound-to-Lira exchange rate raced higher to record an all-time high at 10.7933 in mid-week trade after the Central Bank of the Republic of Turkey kept interest rates unchanged, while the Euro-to-Lira exchange rate rallied to a new high at 9.7664 and the Dollar-to-Lira exchange rate hit 8.3177 having advanced by more than a percent on the day.

The question being asked by those watching the currency at present is how much further the decline can extend.

"How much further can the lira fall? This frequently asked question does not really have a scientific answer. In our humble view, an attempt to guesstimate a level at which USD-TRY overshooting will stay capped is nonsensical," says Tatha Ghose, FX & EM Analyst at Commerzbank in London.

Ghose says this question being posed to foreign exchange analysts rests on an assumption that there must be an equilibrium value of the exchange rate, towards which it is adjusting and once it has fully reached this level, there would be no further pressure for it to weaken.

Above: GBP/TRY over the past 24 hours

However, Ghose says asking this question and expecting a credible answer is an unrealistic proposition as exchange rates can tend to veer widely from any theoretical notion of fair value, for example Purchasing Power Parity.

The Commerzbank analysts says another approach to the Lira outlook question resides with the exchange rate which must be reached before authorities react and attempt to inject some stability into the market.

But, "a precise pain point would also be random guesswork – because it is only a presumed psychological threshold. We may imagine that there is a level of exchange rate at which certain FX liabilities would become insolvent – policymakers know this, and must act before this point is reached. The reality, however, is that there is no such clear cutoff," says Ghose.

Turkey's central bank is nevertheless expected by economists to step in at some point in the future as the pain associated with a depreciating currency begins to bite.

"There is no reason why USD/TRY could not overshoot to, say, 9.00 in coming weeks or months. We still think that a large emergency rate hike by the central bank might be the only policy response we get in the first round," says Ghose.

"While rate hikes by the central bank would no longer act as a credible long-term policy response, we get the sense that a large emergency rate hike might be the only policy response we see in an attempt to break the momentum," he adds.

Above: Daily chart of GBP/TRY

The Lira fell on Wednesday after the Central Bank of the Republic of Turkey delivered their fourth-quarter inflation report, in which they disappointed markets by offering no guidance as to how they would settle the under-fire currency.

Indeed, the market is looking for a robust policy of tightening - in the form of rate rises - but instead it appears the Bank is unwilling to push up the cost of lending at time of acute economic stress.

The Bank revised up its year-end CPI projections for both 2020 and 2021 to 12.1% from 8.9% and 9.4% from 6.2%, respectively.

CBRT Governor Uysal did say that a tight policy stance will persist for as long as needed in order to improve the inflation outlook.

"But he also confirmed that high rates are not a permanent solution, leaving us to continue to believe that tightening by stealth is a transient necessity only, and one that is essentially aimed at controlling TRY rather than inflation," says Mark McCormick, a foreign exchange strategist at TD Securities. "In this respect, we find the CBRT's message little reassuring as it shows the Bank fundamentally remains in denial of the root causes of lira weakness."

"USDTRY continued to nudge higher throughout the press conference, breaking new record highs. Uysal mentioned that Turkey is seeking to grow the size of its swap lines with China, currently standing at $1bn (while another swap line with the Qatari central bank is worth $15bn). But the announcement that the CBRT is seeking to expand its existing swap lines with international central banks made no good to the lira either, which at the time of writing continues to fall against the USD," adds McCormick