USD/TRY: Uneasy calm - Commerzbank,

Commerbank Analyst, Tatha Ghose, considers that the Turkish Lira will probably continue depreciation trend. They forecast USD/TRY at 6.50 by year-end and at 7.00 by September of next year. 

Key Quotes: 

“The Turkish central bank CBT delivered a punchy 625bps rate hike in September, against market expectations of 375bps. Even this latter expectation arose only because the bank pre-announced a hike on its website – otherwise the market had begun to assume that no rate hikes will be possible under greater presidential control over the central bank and monetary policy.”

“CBT will reactively adjust interest rates to inflation, so that the real interest rate will not remain consistently high. Policymakers will tend to accept 5%-10% lira depreciation as normal every year, and accept its inflation consequences – in other words, there will be no reaction as long as lira depreciation is gradual.”

“As long as the market views CBT in such terms, the lira can at best enjoy sideways periods from time to time – but we would expect a long-term weakening trend. We see USD-TRY returning to 6.50 levels by Q1 2019. This will then likely trigger the next 300 bp rate hike from the CBT and then subsequently another 300 bp as inflation stays high through H1 2019. By the middle of 2019, we forecast rates to be lowered back to 25% as growth and inflation would both have softened. Inflation, however, will still be far above target; therefore, we forecast USD-TRY to reach 7.00 by end-2019."

“The Turkish economy recorded strong growth over the past couple of years; this momentum continued up to Q2 this year. But, growth slowed abruptly in Q3 as the lira crisis had its effect and most forecasters anticipate quarter-on-quarter GDP declines beginning Q3; some commentators forecast a hard-landing of the economy and ultimately resort to an IMF package. In our view, however, the helpful effect from overall EM risk sentiment and from geo-politics may allow Turkey to muddle through next year. Our base case is for 1% growth next year but not an outright collapse.”