TRY: Lira in free fall highlighting significant loss of confidence – MUFG

Lee Hardman, Currency Analyst at MUFG, notes that the Turkish lira is one of only a few currencies which have failed to outperform the US dollar at the start of this year.

Key Quotes

“The lira is currently in free fall lifting USD/TRY from around the 3.6000-level to the 3.9000-level over the last five trading days. USD/TRY is currently increasing at an unsustainable pace resulting in the lira becoming even more deeply undervalued.”

“The recent price action is worrying as it highlights a significant loss of confidence in the currency which increases the risk of a currency crisis. There does not appear to be a specific trigger for the lira’s accelerated decline which more likely reflects the ongoing build-up of negative factors which have been eroding confidence in the currency since last year’s coup. The lira has even failed to benefit from the recent improvement in external conditions as US yields and the US dollar have pulled back more broadly.”

“The market is currently providing a test for policymakers in Turkey. An aggressive tightening of monetary policy would help to provide more support for the lira. However, the market is doubtful that the CBoT will act appropriately to raise rates given ongoing opposition to higher rates from the government. The next CBoT meeting on the 24th January could be critical event of the lira in the near-term, although current market dynamics are increasing pressure on the CBoT to act out of scheduled meetings.”

“So far the weakness in the lira has not spread over significantly into the domestic equity and credit markets which maybe helping to ease some concern in the nearterm. However the situation clearly has the potential to deteriorate further without the appropriate policy response. While the lira is becoming more attractively valued at current levels, we would not advise attempting to catch a falling knife at the current juncture. It is not clear to us that peak pessimism towards the lira has been reached.”