USD/TRY: Risks remain heavily tilted to the downside for the Turkish lira – MUFG

Domestic fundamentals offer little support for the Turkish lira according to analysts at MUFG Bank. They forecast USD/TRY at 18.500 by the end of the third quarter and at 20.000 by the first quarter of next year. 

Key Quotes:

“The lira has resumed its slide against the US dollar over the past month resulting in USD/TRY rising to within touching distance of the record high from the end of last year at 18.363. The lira rebound at the end of June proved to be short-lived. The brief rebound was triggered by the announcement from Turkey’s banking regulator that it will restrict commercial lira loans to corporate borrowers if they hold more than TRY15 million in foreign currencies and if the amount exceeds 10% of total assets or annual sales.”

“The underlying bearish trend for the lira has quickly resumed reflecting the lack of foreign investor confidence in domestic policy settings. The CBRT remains reluctant to tighten policy in response to elevated inflation that hit a fresh high of 78.6% in June. It leaves the real policy rate adjusted for inflation in deeply negative territory.”

“In the interim period the balance of risks remains heavily titled to the downside for the lira. Turkey has found it more challenging to finance their current account deficit. The higher energy import bill has resulted in Turkey’s current account deficit widening to USD28 billion in the first five months of this year.”