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In the short run, USD/TRY is likely to trade in a wide range and in a trendless fashion amid mixed flows and lack of central bank support for the lira. At the same time, analysts at Credit Suisse still think that in the slightly longer run a drop below last week’s post-rate decision lows of 7.51-7.52 is on the cards due to a combination of further signaling from Turkish authorities of a shift towards orthodox policies and light foreign positioning.

Key quotes

“USD/TRY will likely trade in a wide range for now. For example, further local buying of dollars could lead USD/TRY to test the 8.20-8.21 area – the level which prevailed before Erdogan made his market-friendly comments on 11 November. The following two considerations help inform this view. Mixed flows: The recent sell-off in the lira suggests that some investors will need to see more signals and measures from the Turkish authorities to rule out the possibility that last week’s rate hike was a one-off attempt to remedy medium-term structural issues. Central bank’s FX policy: The new management of the central bank will be reluctant to sell dollars because it will want to signal it is prioritizing preservation of FX reserves.”

“Despite the scope for further noisy price action in the short-run, we still think that on a slightly longer run downside pressure on USD/TRY will re-emerge and USD/TRY will likely break below its post-rate meeting lows of 7.51-7.52. This view is based on the notion that foreign investor exposure to Turkey is light (by historical and by cross-country comparison), and our assumption that policy announcements are going to remain in a market-friendly direction for now.” 

“Still, we see hurdles which could limit USD/TRY’s downside potential down the line. A big decline in USD/TRY (for example to levels below 7.30) will likely lead the central bank to act on its intention to replenish its FX reserves in a systemic way by buying USD in the market. Additionally, real rates are not necessarily high enough to create a sizable shift in locals’ tendency from recent months to dollarize their local currency deposits. Headline inflation is expected to rise in the first few months of 2021 and erode the real rate on an ex-post basis unless further rate hikes are delivered.”


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