Turkey - Turkish Lira
Oct 26, 2009
Turkish lira (TRY) is among most risk-sensitive of EM currencies and fell about 25% against the US dollar in 2008. After reaching a record low of 1.825 against the US dollar in March, the TRY has strengthened in recent months and many analysts expect it to trade in a narrow range of 1.40-1.50 against the US dollar for the rest of 2009 and into early 2010.
Morgan Stanley notes that the TRY is very correlated with global equity markets, particularly the S&P.
Turkish lira (TRY) is among most risk-sensitive of EM currencies and fell about 25% against the US dollar in 2008. After reaching a record low of 1.825 against the US dollar in March, the TRY has strengthened in recent months and many analysts expect it to trade in a narrow range of 1.40-1.50 against the US dollar for the rest of 2009 and into early 2010.
Morgan Stanley notes that the TRY is very correlated with global equity markets, particularly the S&P.
Without an IMF program, lira weakening will be difficult to avoid, especially in the context of a record-low policy rate, according to some analysts. See: Turkish monetary policy.
Danske: If the central bank releases a dovish inflation report in late October, it might trigger a sell-off in the lira. (October 23, 2009)
What's Driving the Exchange Rate?
Expectations surrounding a possible IMF deal, as well as rate moves and global risk appetite, are the factors determining the path of the TRY in the near term.
In addition to the above factors, Erkin Sahinoz of Eczacibasi notes a recovery in portfolio inflows, large inflows through net errors & omissions account, reduced concerns regarding Turkey’s external financing outlook and recent outlook upgrades by Moody’s & S&P continue to support the Turkish Lira. (September 2009; not available online)
Citi:Global positive sentiment for EM currencies was probably main supportive factor.
Potential downside risks to lira strengthening: 1) aggressive easing; 3) fiscal deterioration; 3) sluggish foreign direct investment (FDI) inflows; 4) protracted economic recovery, 5) shift in global risk appetite, 6) a reversal of the unidentified large capital inflows that have been coming into Turkey and are seen in the Net Errors & Omissions of the balance of payments. (Sep 24, 2009)
Raiffeisen: "The lira exchange rate is strongly aligned with inflation differentials to the Eurozone – 98% correlation with the CPI-based index, 99% with the PPI-based index. The current FX rate is slightly overvalued, as inflation differentials have surpassed the (long-term nominal) depreciation trend in recent years. The real exchange rate demonstrates a clear upward trend. The nominal and real depreciation in 2008 has led to a 5–6% undervaluation compared to the REER trend lines." (Relative PPP method biased towards overvaluation, REER method is biased toward undervaluation.) (October 22, 2009)
Central Bank Intervention
August 4: Central Bank will buy US$30 million in dollars per day, with an option to purchase an additional US$30 million, through daily auctions. Not only will the central bank be taking advantage of a stronger lira to strengthen its reserves, it will also help curb the strengthening of the lira.
Forecasts
Danske foresees the USD/TRY at 1.42, 1.43 and 1.45 in 3, 6 and 12 months, respectively. The TRY/EUR is seen at 2.2, 2.15 and 2.1 in 3, 6 and 12 months, respectively. (October 23, 2009)
Citi forecasts the USD/TRY will trade at 1.42 over next 3 months and at 1.47 in 6-12 months.
Erkin Sahinoz of Eczacibasi: "Going forward, we expect lira to be confined in its recent trading range (1.45 to 1.55) over the next few months or so. We also believe the global backdrop will prove more supportive later in 2009 and lira will strengthen to 1.40-1.45 range towards the end of the year." (September 2009)
Ocakverdi of Yapi Kredi: Historical evidence suggests that very high levels of exchange rates triggered by systemic shocks are not permanent and unwind once the disturbance is over. There happen to be two different threshold levels to which exchange rates backtrack depending on the prevailing conditions in the country at the time. TRY/USD levels stabilize around 1.31 during tranquil times, while it shifts to 1.52 when the economy is exposed to domestic and/or external stress.
Turkey's monetary Policy
In October 2009, Turkey’s central bank (CBT) cut the key policy rate by 50 basis points (bp) to a historical low of 6.75%. Central bank felt it had room to implement the rate cut, given the sluggish economy and the fact that it expects inflation to 'significantly' undershoot its year-end target of 7.5%. Since November 2008, the cumulative monetary easing has added up to 1000 basis points in cuts.
Central bank's rationale for October rate cut: "[O]ngoing recovery in economic activity will be gradual and protracted. External demand and domestic investment demand remain weak. Moreover, consumption demand, after having increased markedly during the second quarter, is expected to display a weaker course in the third quarter...Therefore, inflation is expected to remain at low levels for a long period of time."
Liquidity Shortage
BNP: Given uncertainty over an IMF deal, the CBT has started to address the liquidity shortage. In late October, the CBT lowered the reserve requirement to 5% from 6%, "injecting about TRY3bn extra liquidity into the system."
BNP: "The CBT’s next move could be to start purchasing government bonds."
(Oct 22, 2009)
RGE Daily.com
