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Analysts at Credit Suisse remain constructive on the lira and revise the short-term USD/TRY target to 7.00 as the pair is set to continue to trend lower as long as real rates are relatively elevated and investors continue to expect Turkish authorities to remain on the path towards “orthodoxy”. 

Key quotes

“We still think that USD/TRY is exposed mainly to downside risk and we now set a new short-term target of 7.00. Cross-border inflows into local currency bonds and equities have been substantial recently but foreign positioning remains light by historical standards, and by the standards of other comparable countries. Importantly, we see a good chance that households will soon stop replacing lira-denominated deposits by dollar-denominated deposits. Real rates on lira deposits have become attractive by historical standards after the policy rate hike of 200bps in late December.”

“We suspect that markets are going to increasingly price in the possibility that real rates will stay elevated for now which will in turn help the central bank to bring down inflation and bring about improvement in the current account later this year. So while recent macro data have not been encouraging they are probably set to improve.”

“We refrain from setting a more aggressive short-term target for USD/TRY at this point because we expect FX purchases by the central bank and local corporates to become a steady source of dollar demand in the future. We think that these two sources of FX demand could slow down the process of taking USD/TRY to a new lower equilibrium but we do not expect them to be significant enough to reverse the USD/TRY trend as long as real rates remain relatively elevated and investors continue to expect Turkish authorities to remain on the path towards ‘orthodoxy’.”