Lira goes to black market. Forecast as of 10.05.2023

2023.05.10 2023.05.10
Lira goes to black market. Forecast as of 10.05.2023logo

No one trusts the official exchange rates of the lira anymore. The central bank and the government are making titanic efforts to prevent USDTRY from rising above 20, but the real exchange rate is different. Let’s talk about this topic and draw up a trading plan.

Quarterly lira fundamental forecast

During the first 10 years of Recep Tayyip Erdogan in power, the Turkish economy quadrupled and consistently outperformed its G20 peers. In 2013, it reached $960 billion, but since then it has never crossed the $1 trillion mark. Growth at any cost resulted in an acceleration of inflation to 86% in October, a collapse of the lira, and a currency crisis. All this can cost the current leader the presidency.

Dynamics of Turkish economy

Source: Bloomberg.

Opinion polls show a slight advantage for opposition candidate Kemal Kılıçdaroğlu ahead of the May 14 elections, which increases the likelihood of a May 28 runoff. Meanwhile, lira volatility jumped from 8.4% to 74%, and the derivatives market gives a 50% chance that USDTRY will rise to 26 by the end of the third quarter.

A significant weakening of the lira should be expected, Commerzbank said, as artificial government support for official exchange rates becomes increasingly shaky. Ultimately, it will have to be abandoned. Restrictions on the sale of foreign exchange, new rules for trading gold, the introduction of devaluation-protected deposits, and other capital controls led to the formation of a black market. There, USDTRY quotes reach 23-24.

Dynamics of USDTRY in official and black markets

Source: Bloomberg.

Unlike the government, which intends to stop the activities of money changers, the central bank pretends not to know that such a market exists. It is natural for the regulator, who follows the lead of Erdogan and lowers interest rates in order to … slow down inflation. The pace of consumer price growth did fall from 86% in October to 44% in April, but this is due to the high base effect of last year. On a monthly basis, CPI continues to add 2.3%-3.2%, which indicates long-term high inflation.

Thus, the president’s intention to achieve the expansion of Turkey’s GDP to $1 trillion by any means turned into the use of unorthodox monetary policy and a currency crisis. The disproportions in the country’s economy are so great that colossal efforts will be required to eliminate them.

For example, investors believe that an increase in the main interest rate from the current 8.5% to 40% is required to curb the high inflation. This will lead to massive sales of Turkish bonds and the flight of foreign investors from the market, which will push the USDTRY even higher.

Quarterly USDTRY trading plan

Thus, no matter how Turkey’s presidential election ends, whether its central bank remains committed to Erdogan’s unorthodox monetary expansion or starts to return to traditional methods, the lira will go down. I have many times suggested buying the USDTRY in 2023, in February, and April 2023. Those whose entered purchases then, make profits now. One could consider entering longs; the upside target is in the range of 24-25.

Price chart of USDTRY in real time mode

The content of this article reflects the author’s opinion and does not necessarily reflect the official position of LiteFinance. The material published on this page is provided for informational purposes only and should not be considered as the provision of investment advice for the purposes of Directive 2004/39/EC.

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