TRY: Falling volatility in the medium term – Danske Bank

Analysts at Danske Bank, forecast USD/TRY at 6.40 in 3M, 6.90 in 6M and 7.50 in 12M. They warn about risks of a recession in Turkey.  

Key Quotes:  

“We expect 2018 GDP to grow 3.5% y/y, cutting our 2019 GDP growth projection to 1.8% y/y (previously 2.6% y/y) and to 2.1% from 2.8% in 2020. We see that risks of recession during the next 12 months have notably increased.”

“Turkey’s central bank (TCMB) surprised the markets with a 625bp hike of the oneweek repo rate to 24.00%, which moved the USD/TRY to new lower levels. We expected a 300bp hike and Bloomberg consensus anticipated a 325bp increase. In its most recent statement, the TCMB signalled that ‘if needed, further monetary tightening
will be delivered’. Given continuing acceleration in inflation (+2.05pp to 17.9% y/y in August) and risks of more weakening in the TRY, another hike is possible in Q4 18.”

“We see falling volatility in the TRY in the medium term, as the TCMB is returning to a conventional monetary policy framework. We remain cautious in the medium to long term on pressure from a high oil price, volatile portfolio flows and a wide current account deficit.”

“Downside risks to our TRY forecasts are still geopolitical, if the confrontation with the US escalates, e.g. on the S-400 anti-aircraft weapon system deliveries by Russia, and the US continues to sanction the Turkish State. The TCMB’s easing of political pressure and worsening macro factors also present downside risks to our TRY forecasts. Fed monetary tightening is the general emerging market downside risk for the TRY.”