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The Turkish lira plunged to a record low against the dollar this week after state banks allegedly refrained from intervening on behalf of the CBRT. Without a proper response from the CBRT and the Erdogan administration the bias will remain firmly skewed to the upside in USD/TRY. The latest developments have forced economists at Rabobank to revise higher the trajectory of USD/TRY. 

Key quotes

“We expect USD/TRY to peak at 7.80 based on the assumption that Turkish authorities, albeit reluctantly, eventually announce proper measures to restore at least some level of confidence in the lira.”

“It is important to emphasise that USD/TRY could rally well above 7.80 before a serious attempt is made by the central bank and the Erdogan administration to stabilise the currency. The rally in USD/TRY should be followed by a correction to around 7.00 on the 12-month horizon. The scale of a retracement, and how long it may last, will depend on the set of measures that the Turkish authorities decide to use.”

“At this stage, there is no room for error and every decision could be critical for the lira and local assets. The behaviour of Turkish residents is one of the most critical factors to watch in the coming weeks. If a relatively high percentage of Turks decide to withdraw dollars from their bank deposits to keep these under their proverbial mattresses for a while, the current scheme of replenishing FX reserves through FX swaps would likely collapse. This would send USD/TRY well above our current forecast.”