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USD/TRY spiked up to 1.6% in intraday trading yesterday to as much as 6.97-6.98. This level is nearly 2% above the tight 6.84-6.86 range that the pair held the vast majority of time between the middle of June and Friday of last week. Subsequently, economists at Credit Suisse have revised the short-term USD/TRY target to 7.15 (from a range of 6.95-7.04 previously). 

Key quotes

“We opt to raise our short-term USD/TRY target to 7.15 after the pair rose very close to our previous target range in a more aggressive fashion than we projected. Our new forecast is roughly in line with the two-month USD/TRY forwards pricing. It represents our view that USD/TRY will most likely continue to rise roughly in line with forwards. We are currently biased towards thinking that USD/TRY is likely to rise to these levels later rather than sooner within the next few weeks. That is because we suspect that the central bank and state banks will aim to keep USD/TRY below the psychological 7.00 level for now (like they did in the second half of April).”

“We are not revising our USD/TRY forecast much above two-months forward pricing for the following two reasons. The underlying depreciation pressures on the lira from the current account and due principal payments on medium and long-term external debt are not going to be extremely strong in the coming weeks. Meanwhile foreign holdings of Turkish local currency-denominated assets are small. This limits the ability of portfolio outflows to create substantial pressure on the lira.  We think the dollar will remain generally soft and expect a sustained bid for EM high-yielding currencies for now, or at least no reversal of that bid in a major way.

“Risks to our even higher than before short-term USD/TRY forecast remain asymmetrically weighted towards the upside. USD/TRY is likely to overshoot our target in case the global environment turns out to be less supportive than we assume in our base case, or if the balance of payments outlook deteriorates in a way that markets cannot ignore. If by contrast, risk-on sentiment picks up substantially further across the world, we think that USD/TRY will be limited on the downside to 6.80 (we previously marked the 6.75 level as the downside extreme).”