USD/TRY: Downside risks for lira have eased in near-term – MUFG

Analysts at MUFG Bank, point out the Turkish lira has benefited from broad-based improvement in sentiment towards emerging markets. They forecast USD/TRY at 6.9 during the second quarter and at 7.2 by the fourth quarter. 

Key Quotes:

“The lira has had another volatile month as USD/TRY hit a new record high of 7.2690 on 7th May before staging an impressive rebound. The largest lira rebound since May/June of last year. The lira has benefitted alongside other hard hit emerging market currencies from the broadening US dollar sell off. Capital flows to emerging market have improved since the Fed took aggressive policy action to dampen US dollar strength and support the US economy.”

“The lira has benefitted from the recent agreement from Qatar to extend the FX swap line from USD5 billion to USD15 billion. It has helped at least temporarily to ease concerns over the sharp drawdown in Turkey’s FX reserves.”

“The developments have proved sufficient to ease lira selling pressure in the near-term. However, doubts persist over the sustainability of recent gains. The CBoT has continued to ease monetary policy citing concern over demand and downside risk to inflation. Their forecast for inflation this year was lowered to 7.4%. Yet the headline inflation rate remained materially higher at 11.1% in April. It leaves the real policy rate adjusted for inflation deeply in negative territory. The CBoT continues to carry out plans to front-load government bond purchases. In these circumstances, we expect the lira to weaken in the year ahead.”