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“We are witnessing a text book correction in USD/TRY following its parabolic move higher from around 5.00 level earlier this month to the all-time high of 7.2362 set on August 13,” Rabobank analysts note and add that it’s still too early to declare that the worst is over for the lira.

Key quotes

“The latest fall in the value of the Turkish lira will have serious inflationary consequences. Even before the lira extended its substantial year-to-date losses to more than 40% against the USD and the EUR, inflation accelerated to 15.85% y/y in July. Consumer prices are set to rise even further in the coming months. This will be accompanied by further deterioration in inflation expectations. The bias is firmly skewed in favour of tighter monetary policy perhaps at an emergency meeting should the selling pressure on the lira resurface ahead of September 13 when Turkish policy makers are scheduled to held their meeting.”

“The latest developments on that front are not encouraging. Bloomberg reported that White House National Security Adviser John Bolton warned Turkey’s ambassador on Monday that the US has nothing further to negotiate until detained pastor Brunson is released.”

“To restore shattered confidence amongst investors it is essential that the pace of structural reforms accelerates. This would increase Turkey’s potential growth in sustainable and well-balanced way over the long-term horizon and would reduce the main source of its vulnerabilities: persistently high inflation and a wide current account deficit financed by volatile capital inflows.”

“Unless those three critical issues are solved either simultaneously or in a very quick succession,  scope for a retracement in USD/TRY is likely to prove limited. At this stage the initial support comes at around 6.45. Below that, 6.00 would be next level to watch followed by 5.55. Even if USD/TRY does fall sharply in the coming days, it could be too late for Turkey to avoid a significant slowdown in economic activity accompanied by even higher consumer prices. The damage has been done already.”