Search ForexCrunch

The severely battered Turkish lira extended its substantial year-to-date losses beyond yet another milestone, breaching the 8.00 level versus the dollar. Parabolic moves higher in USD/TRY tend to be followed by correction and consolidation, as Piotr Matys, Senior Emerging Markets FX Strategist at Rabobank, notes.

Key quotes

“Apart from growing risks that if Biden is elected as US president, the former VP may impose severe sanctions on Turkey for purchasing the Russian S-400 defence system, the market is also concerned about rapidly deteriorating relationship between Turkey and France. Over the weekend President Erdogan urged a boycott of French goods and very strongly criticised President Macron. He also dared the US to sanction Turkey.”

“Urgent action is required to stabilise the lira and prevent further damage to inflation, the real economy and to preserve what is still left from Turkey’s image as an attractive country to invest.”

“We find it increasingly difficult to keep looking at Turkey from a glass-half full perspective  – for example, to argue that Turkey has a tremendous potential to benefit from diversification of global supply chains away from Asia closer to Europe. However, it is important to stress that on previous occasions when the lira was in a free fall, the CBRT did eventually do what was required and raised the policy rate substantially.”

“Without taking decisive steps, the path of the least resistance will remain skewed firmly to the upside in USD/TRY. A toxic mixture of a record high USD/TRY and fading prospects of a V-shaped recovery at home and also abroad –due to the second wave of the pandemic– may culminate in a full-scale crisis and structural damage to the economy.”