USD/TRY: Overvalued Turkish lira to weaken further – MUFG

The Turkish lira is set to weaken further as the Central Bank of the Republic of Turkey (CBRT) continues to cut interest rate. They see USD/TRY at 9.0500 by the fourth quarter and at 9.55 in a year. 

Key Quotes:

“The lira weakened sharply against the US dollar resulting in USD/TRY hitting a new record high of 8.9577. The lira’s sharp reversal lower was triggered by the CBRT’s surprise decision to begin cutting rates sooner than expected. We had been pencilling in rate cuts towards the end of this year.”

“The CBRT has shifted their policy focus recently to place more emphasis on core inflation which has been slowing modestly from a peak of 17.8% in March to 16.8% in August. However, it was a bold move for the CBRT to lower rates before it had become clearer that headline inflation has peaked. The annual rate of headline inflation picked up further to 19.25% in August. It leaves the real policy rate after adjusting for headline inflation in negative territory which provides less support for the lira.”

“Downward pressure on the lira has been reinforced as well by the timing of the rate cut as it quickly followed the Fed’s more hawkish policy update. The Fed signalled that it plans to taper QE more quickly than expected by likely making a taper announcement in November and then bringing an end to the tapering process by around the middle of next year.”

“The ongoing rise in energy prices driven by supply constraints is a negative development for Turkey’s external balance. In these circumstances, we expect the overvalued lira to weaken further.”