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The lira has weakened sharply since the central bank decided to leave its main interest rate unchanged at its policy meeting on 22 October. USD/TRY rose on Monday-Tuesday to a new all-time high well above 8.00. Economists at Credit Suisse raise the short-term USD/TRY target range to 8.40-8.50 (from a range of 7.65-7.75 previously). The new forecast reflects the idea that the new dynamics that had developed in terms of markets expectations for further hikes can keep USD/TRY exposed on the upside.

Key quotes

“We now opt to raise our short-term USD/TRY forecast to 8.40-8.50 which is more than 3% above the current spot rate. Our logic is that the bar for creating a balanced flow for the lira has been raised by investor disappointment over the rate decision last week. We suspect that investors will now demand much more aggressive and decisive increases in the effective funding rate in order to consider long lira positions.”

“We believe that the dynamics that were created after last week’s rate decision keep the lira vulnerable as the central bank could continue to deliver smaller or less clear rate hikes than investors expect.”

“We cannot rule out a short-term stabilization in USD/TRY (perhaps around 8.20) after the big move that has unfolded since late last week. This could happen even in the absence of sizable increases in the effective funding rate. However, a decline in USD/TRY back well below 8.00 will probably require a specific scenario of sizable increases in the effective funding rate and a favourable US elections outcome for the lira.”