USD/TRY seen falling to 7.1000 in the second quarter –  MUFG

Analysts at MUFG Bank, point out the USD/TRY is making a sharp correction lower after a strong run. They forecast the pair will trade at 7.2000 by the end of the first quarter and at 7.1000 by the end of the second; and then will start trending higher. 

Key Quotes:

“A consistently tight policy is strengthening the CBRT’s credibility. This has been leading a virtuous cycle whereby the main macro imbalances (inflation and current account deficit) are reducing, the dollarisation trend is reversing, foreign investors are returning and eventually, the TRY would normalise towards its fair value.”

“We believe that the possibility of such a TRY-positive sequence is now more likely for a number of core rationales. First, the CBRT’s stance has consistently been tight and the narrative resolutely hawkish. Second, the reduction of the current account deficit is underway. Third, pre-conditions for de-dollarisation are in place. Fourth, foreign appetite for TRY assets is on the rise. Finally, a clear FX purchases programme will bolster investor confidence.”

“From a monetary policy perspective, we still expect the CBRT could begin to ease in H2 2021, though the timing will be conditional on evidence of weakening demand pressure, diminishing inflationary expectations, a robust pickup in de-dollarisation and TRY stability.”