The policy shift in Turkey remove pressure on the lire, point out analysts at MUFG Bank. They consider lira’s strength could even surprise to the upside as higher rates provide more support. They forecast USD/TRY at 7.2000 by the end of the first quarter and at 7.000 by the end of the second.
“The lira is carrying over strong upward momentum from the end of last year. The recent pivotal shift to more orthodox policy settings in Turkey has helped to restore confidence in the lira and Turkish assets following the sharp sell-off during most of 2020, which resulted in it becoming deeply undervalued.”
“We have been encouraged as well by comments from Governor Agbal emphasizing that they stand ready to tighten policy further, and committing to keep higher rates in place until a permanent fall in inflation is achieved. He also outlined plans to overhaul FX policy by stating that the CBoT will no longer sell US dollars to support the lira. It brings an end to the failed policy that has seen FX reserves run down by an estimated USD150 billion in recent years. Turkey will now seek to strengthen FX reserves gradually.”
“The stage is set for the lira to extend its advance at the start of this year as prior undervaluation reverses. The higher yields on offer in Turkey will encourage a stronger lira. However, the sustainability of those gains remains uncertain.”