USD/TRY: Lira to remain under downward pressure – MUFG

During July, the Turkish lira weakened against the US dollar from 6.8523 to 6.9608. Risks remain skewed to the downside for the lira due to a worsening current account balance and rates cut by the CBoT. Therefore, economists at MUFG Bank expect a higher USD/TRY pair for the rest of the year.

Key quotes

“While the COVID demand shock has helped to improve current account balances in many emerging market economies, it has not been the case in Turkey. The current account deficit has widened sharply in recent months to its highest level since the 1H 2018 in the run up to the currency crisis in the summer of that year.” 

“The CBoT’s decision to aggressively cut rates leaves the lira vulnerable as well. It has driven the real policy rate deeper into negative territory as inflation is holding up better than expected to the negative demand shock. The annual rate of headline and core inflation both accelerated to 12.6% and 11.6% respectively in June. It prompted the CBoT to revise higher their year-end inflation forecast for this year to 8.9%. It further reduces the likelihood of more rate cuts.” 

“If the lira continues to weaken, it will begin to increase pressure on the CBoT to reverse rate cuts. In these circumstances, we expect the lira to continue weakening in the year ahead.”