Turkish Lira Could be Past the Worst: HSBC

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Eye-watering Turkish Lira depreciation could be about to moderate according to new research from HSBC, even if headwinds continue to persist over the remainder of the year.

Suggesting the worst might be behind the Lira, HSBC says in a new research note that signs of improvement can be noted in some of the key drivers of the currency.

"The preliminary trade balance for June finally showed a narrowing deficit, while a strong tourism season and the rebound in FX reserves could be the first signs of a positive turnaround in Balance of Payment dynamics," says Murat Toprak, CEEMEA FX Strategist at HSBC in London.

Above: "The current account deficit remains a key challenge for the TRY" ... "but a narrower trade deficit in June (below) may signal a change..." - HSBC.

TRY has weakened rapidly and significantly since the elections as authorities opted to stop fighting depreciation: the Pound to Lira exchange rate rose 40% in the second quarter of 2023 alone and is at 33.68 at the time of writing.

Dollar-Lira weakened by 35% in Q2 and is at 26.09 at present with the Euro-Lira exchange rate rising 36% to 28.60.

Should HSBC be correct in their assessment that fundamentals are improving then these exchange rates might be in for a period of consolidation, or even reversal.

"The recent pivot in monetary policy direction is also a positive development for the currency," says Toprak referring to the Turkish central bank's decision to raise interest rates for the first time in two years on June 22.

The hike from 8.5% to 15% signalled a break from the unorthodox era of monetary policy dictated by President Erdogan, and is itself a supportive signal, but HSBC warns the potential positive impact of additional rate hikes is likely to be offset by higher inflation.

The overall external financing requirements facing Turkey meanwhile remain sizeable and FX reserves are estimated to be low by various measures says Toprak.

"The real question is whether the sizeable FX adjustment seen over the recent period is mostly complete, i.e. if the TRY is now more aligned with its fundamentals," queries Toprak.

Modelling by HSBC finds the bulk of the value normalisation undertaken by the Lira has now materialised, prompting HSBC to hold a year-end forecast for USD/TRY at 27.0, putting it close to current values.

HSBC warns, however, that the currency will remain volatile and overshoots to the forecast can be anticipated, particularly if the new central bank administration proves less interventionist in the FX market.