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Analysts at MUFG Bank, see recent gains in the Turkish Lira unlikely to be sustained but at the same time consider that market participants are now less concerned about the risks of another sell-off in TRY.  

Key Quotes:

“The lira has strengthened against the US dollar despite aggressive CBoT monetary easing. The surprising resilience of the lira and sharply lower policy rate has encouraged inflows into the Turkey’s debt market.”

“President Erdogan’s desire for lower rates was more forcefully imposed by his decision to replace former CBoT Governor Cetinkaya with new Governor Uysal. It undermined the independence of CBoT policy. We now expect the CBoT to continue aggressively easing policy during the second half of this year.”

“Hopes for a shift back towards more orthodox policy settings and economic reforms are fading.”

“It should reduce the risk of a double dip recession. The sharp narrowing of the Turkey’s current account deficit is helping to provide more support for the lira. In the first five months of this year the current account deficit narrowed to USD3.3 billion compared to USD28 billion in the same period of last year. The domestic demand slowdown has sharply narrowed the trade deficit. However, we doubt that recent lira gains can be sustained in the year ahead.”