Danske Research Team
Danske Bank A/S
A deepening diplomatic stand-off between Turkey and the US over Turkey's detainment of a US pastor has pressured the TRY to a new historical lows. This stand-off resulting in US sanctions against two Turkish ministers adds to the woes for the TRY due to a combination of expansionary domestic policies, a structurally weak current account position and a large corporate and household external FX position, coupled with uncertainty about the independence of the central bank and a challenging regional environment.
We expect the Turkish central bank (TCMB) to remain less hawkish than prior to the general election on 24 June, being very cautious with policy rate instruments, while facilitating FX liquidity operations for local banks. However, we believe further deterioration in the TRY over 5.60 could cause an emergency hike.
Given the latest change in the geopolitical situation, we raise our USD/TRY estimate, expecting the TRY to rebound from current levels. Technical indicators show the pair being significantly overbought and, in our view, Turkey-US diplomatic ties are likely to see improvement over the next week, as the Turkish diplomatic delegation arrives in the US.
Our new USD/TRY forecast is 5.10 in 1M (previously 4.70), 5.30 in 3M, 5.50 in 6M (4.80 and 4.90 previously) and 5.65 in 12M (previously 5.10).
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