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This week’s sell-off has seen USD/TRY climb back above the 7.2000-level after threatening to break below the 7.0000-level earlier this month. Nonetheless, economists at MUFG do not believe the lira sell-off is sustainable.

Key quotes

“The turnaround in sentiment has followed comments from President Erdogan defending the policies implemented under former Finance Minister Albayrak against critics who say they cost Turkey more than $100 billion in FX reserves. He also told parliament that ‘we are determined to reduce inflation, stabilize FX rates and cut interest rates’.” 

“The lira sell-off this week highlights that it will remain sensitive to any signs that the CBRT is softening its resolve to maintain a tight policy. Market participants have questioned CBRT policy after they raised the reserve requirement ratios by 2% for all lira liabilities on Wednesday to tighten liquidity. It has cast some doubt on whether the CBRT is now moving away from tightening policy by hiking the key policy rate. A step that would inspire less confidence amongst market participants.” 

“For now, we remain encouraged by the CBRT’s commitment to maintain a tight monetary policy until there is clear evidence of falling inflation. We do not expect the sharp lira sell-off to prove sustainable.”

 

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