TRY underperforming, where next in USD/TRY? - BBH

Analysts at Brown Brothers Harriman explained that the lira continues to underperform.  

Key Quotes:

"In 2016, TRY fell -17% vs. USD and was behind only the worst performer ARS (-18%).  So far in 2017, TRY is -1.1% YTD and is again ahead of only the worst performer ARS (-1.9%).  Our EM FX model shows the lira to have VERY WEAK fundamentals, so this year’s underperformance is to be expected.

USD/TRY has traded largely in a narrow 3.50-3.80 range since the end of January.  Retracement objectives from the January-April drop come in near 3.67 (38%), 3.7150 (50%), and 3.76 (62%), while the 200-day moving average comes in near 3.4205.

Turkish equities are outperforming after lagging last year.  In 2016, MSCI Turkey was up 4% vs. 7% for MSCI EM.  So far this year, MSCI Turkey is up 24.4% YTD and compares to 17% YTD for MSCI EM.  This outperformance should ebb, as our EM Equity model has Turkey at a NEUTRAL position.  

Turkish bonds have outperformed recently.  The yield on 10-year local currency government bonds is about -64 bp YTD.  This is behind only the best performers Argentina (-149 bp), Indonesia (-92 bp), Russia (-87 bp), Colombia (-77 bp), and Peru (-64 bp).  With inflation likely to continue rising and the central bank likely to tighten further, we think Turkish bonds will start underperforming.  

Our own sovereign ratings model has Turkey’s implied rating worsening a notch this quarter to BB-/Ba3/BB-.  We think Turkey continues to face growing downgrade risks to its BB/Ba1/BB+ ratings."