USD/TRY: Turkish lira could appreciate further during 2021 – Capital Economics

Despite being the best-performing major among emerging market currencies, the Turkish lira could rise further during 2021 according to economists at Capital Economics. They forecast USD/TRY will end the year around 6.25.

Key Quotes: 

“Despite the extent of the lira’s rally so far, we think that there is scope for it to appreciate further this year.”

“We expect the shift in the CBRT’s policymaking to last. The central bank noted in today’s statement that the monetary policy stance will remain tight until inflation returns to the 5% target.”

“We suspect that the improvement in the outlook for monetary policy and inflation is not fully reflected in the current level of the exchange rate.”

“We think that short-term interest rates in Turkey, which are far higher than in any other major EM, will further support the lira.”

“There have been encouraging signs that Turkey’s government is trying to ease geopolitical tensions with the US and the EU, which could reduce Turkey’s risk premium further.”

“We think that the global backdrop will remain benign. We expect appetite for risk to increase on the back of a strong recovery in the global economy and the US dollar to weaken against EM currencies in general.”

“We now forecast the lira to end this year at 6.25/$, which implies a further appreciation of around 12% from its current level of ~7.00/$.”