Turkish Lira Heads for Rare Weekly Gain but Downgraded Forecasts Warn of Further Losses

- Downgraded forecasts tip USD/TRY for 11.0 in 2022
- Could see GBP/TRY nearing 15.00 if sell-off renews
- After CBRT, gov rhetoric encouraged bearish market

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The Lira was on course to post gains for the week on Friday, although the latest interest rate policy decision from the Central Bank of the Republic of Turkey (CBRT) has led analysts to cut forecasts steeply and may mean it's just a matter of time before fresh losses are seen.

Turkey’s Lira had pushed USD/TRY and GBP/TRY back below the week’s opening levels by Friday, although October’s losses remained the largest since March during the final trading day before November.

This is after the Lira was sold by the bucketload on Monday following weekend statements reportedly made by President Recep Tayip Erdogan, which prompted concern about Turkey’s relations with key trade partners.

"While pressure on the TRY will ease when (or if) Erdogan backs down from throwing out the 10 diplomats, we do not expect Erdogan to stop demanding lower interest rates just yet. Expectations of monetary easing will likely push USD/TRY to above 10.00 within the next two weeks,” says Per Hammarlund, chief EM strategist at SEB.

The geopolitical, economic and financial backdrop for the Lira was evocative of that prevailing in 2018 when the currency sustained some of its heaviest losses in history as a spat with Washington escalated amid a period of market protest over the central bank’s monetary policy.

Above: USD/TRY shown at weekly intervals with GBP/TRY.

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While Monday’s losses were swiftly reversed and international tensions have since eased, the latest policy decisions from the CBRT have given encouragement to a bearish market after the bank cut its interest rate in both September and October, shaving 3% off the benchmark since August.

The second interest rate cut came on October 21 and although an earlier intervention and shake up of the CBRT’s Monetary Policy Committee by Ankara had led markets to view a rate cut as likely, many analysts had suggested that only a -1% reduction would be seen.

“We had warned in our last update that a dangerous monetary policy experiment had been unleashed upon Turkey,” says Tatha Ghose, an analyst at Commerzbank, who forecasts a USD/TRY exchange rate of 10.0 for year-end and a move up to 11.0 by March 2022.

In the event the CBRT cut the benchmark for borrowing costs to 16%, from 18% in September and 19% the prior month while leading analysts and investors to expect further reductions in the months ahead.

“Further cuts are in the pipeline. The argument that inflation is transitory may be true broadly, but not in the case of Turkey, which has experienced high inflation for over a decade. The ever-depreciating exchange rate is recognised as the main culprit,” Ghose wrote in a research note this week.

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Ghose’s forecasts for USD/TRY and and the Commerzbank team’s projection of a 1.35 GBP/USD rate suggest that over the coming quarters the GBP/TRY rate might be likely to return to its recent high of 13.50, before rising further to 15.0 early in the new year.

The March 2022 projection reflects a downgrade from the earlier level of 10.0 for USD/TRY and 13.5 for GBP/TRY but is based on the assumption that further interest rate cuts are likely to be seen in the interim.

“We consider that limited room remains until the end of the year for our downward correction in the policy rate due to supply-side incidental factors,” CBRT Governor Sahap Kavcioglu said on Thursday when presenting the latest Turkish inflation report, echoing statements made in October's policy decision.

Governor Kavcioglu’s Thursday remarks suggest the CBRT could potentially refrain from further rate cuts through the rest of 2021 or perhaps even longer, which might then provide the Lira with further respite in coming months.

That might in turn validate the reversal signals given off by the Turkish Lira charts, which was flagged by Commerzbank’s technical analysts and colleagues of Ghose in research earlier this week.

“USD/TRY is seeing a vicious reversal from the 9.8610 high. The spike is indicative of exhaustion and we note the divergence of the daily RSI. This leaves the uptrend at 9.20 exposed,” Karen Jones and Axel Rudolph, both technical analysts, said in a Tuesday presentation.

Source: Commerzbank. Click image for closer inspection.