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The Turkish lira could be on the brink of yet another precipitous fall versus the dollar. What has prevented USD/TRY from rising to 8.00 or even higher is the ability of the CBRT to replenish its FX reserves and keep spending tens of billions of dollars intervening but such a scheme is about to break down, according to economists at Rabobank. 

Key quotes

“The upside pressure on USD/TRY is fuelled by well-known structural issues of persistently high inflation, a wide current account deficit and a strong preference to use credit to stimulate the economy at all costs. There are also some geopolitical risks related to Turkish involvement in Syria, Libya, and drilling activities around Cyprus.”

“The level of trust in banks is a critical factor to watch in the coming months or even weeks. It has to remain high to prevent Turks from withdrawing substantial amount of dollars from banks. Without retail USD deposits the CBRT will not be able to replenish FX reserves quickly enough to prevent the lira from falling precipitously against the dollar.” 

“The current scheme of replenishing FX reserves through FX swaps would likely collapse, sending USD/TRY to a new record high that starts with an 8 or perhaps even a two-digit number.”