USD/TRY rebounds from lows near 5.70, focus on Istanbul

• USD/TRY reverses the downside and tests the 5.80 area.
• Erdogan’s AK Party lost Istanbul mayoral elections… again.
• Turkey Manufacturing Confidence ticked higher to 102.5.

The Turkish Lira is trading on a firm note at the beginning of the week, taking USD/TRY to the 5.80 region after bottoming out near the 5.70 neighbourhood.

USD/TRY on the defensive post-elections

The better tone in the Lira follows the victory of the Nation Alliance Party (CHP) over Erdogan’s Justice and Development Party (AKP) at the rerun of the municipal elections in Istanbul on Sunday. In fact, CHP’s candidate E.Imamoglu won 28 districts while AKP’s candidate B.Yildirim lost 12 districts vs. his results in the March elections.

Furthermore, TRY is deriving extra support after following auspicious results from the domestic docket, where Manufacturing Confidence improved to 102.5 for the current month and Capacity Utilization rose to 77.1% during the same period.

TRY and the majority of Turkish assets are trading on an upbeat mood today in the wake of yesterday’s results and particularly after President R.Y.Erdogan conceded the defeat of his party at the elections.

However, the current strength in TRY could be put to the test in the near term, as US sanctions against the country following the purchase of the Russian defence system looms closer.

What to look for around TRY

Recently, the CBRT left no doubts it will continue to support the current tight monetary conditions. However, the enduring disinflation process seen in past months opens the door to a potential shift from the central bank to a more accommodative stance, including the palpable chance of rate cuts despite this move on rates appears untimely in the near (and medium) term. Real headwinds for the Lira, however, remain well and sound and loom from the increasing likeliness of US sanctions and further escalation in US-Turkey tensions around the Russian S-400 defence system. It does not get better for TRY if we include in the equation the probable acceleration of outflows from the EM space in response to the deterioration of the US-China trade scenario. Against this context, another move to the psychological yardstick at 6.00 the figure in the short-term horizon should be everything but ruled out. On the positive side for TRY, Sunday’s results at the mayoral elections plus forecasted rate cuts by the Fed in the short-term should lend support to the currency and the EM space in general.

USD/TRY key levels

At the moment the pair is losing 0.37% at 5.7941 and a breakdown of 5.7116 (low Jun.24) would aim for 5.7025 (50% Fibo retracement of the 2019 rally) and then 5.6560 (low Jun.5). On the other hand, the next up barrier is located at 5.9038 (55-day SMA) followed by 5.9326 (high Jun.14) and finally 6.1516 (high May 23).