USD/TRY: Forecast revised higher but a short-term correction is possible - Danske Bank

Analysts at Danske Bank revised their forecast for USD/TRY higher after recent developments but in the short-term they see some potential for a correction. 

Key Quotes: 

“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.”

“We see that in the near term the TRY could recover under 5.20 versus the USD, as the dust from the diplomatic spat settles down.”

“If the diplomatic spat between Turkey and the US is not settled this week ,we expect the TRY to resume its weakening again, forcing the TCMB to hike its policy rate. In this case, the central bank would need a minimum 300bp hike to stop the TRY’s freefall.”

“As we see Erdoğan being critical about the US-led institutions, it is hard to assume Turkey will ask for an IMF bailout. However, we believe Turkey’s improved ties with Russia could push the Turkish government to seek funding from Russia.”

“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).”