2023.04.19 2023.04.19
Lira sees no way. Forecast as of 19.04.2023Dmitri Demidenkohttps://www.litefinance.org/blog/authors/dmitri-demidenko/
There is hope that the change of power in Turkey after May 14 will allow the central bank to move away from unorthodox monetary policy. However, the imbalances in the economy are so great that it makes no sense to bet on a lira rally. Let’s talk about this topic and draw up a USDTRY trading plan.
Lira fundamental forecast for six months
Although the Central Bank of the Republic of Turkey cut the interest rate from 19% in late 2021 to the current 8.5%, the interest rates on deposits and loans in commercial banks are growing. Deposit rates have risen 10 percentage points to 29% in the last six months. Rates on accounts designed to protect against lira depreciation have doubled to more than 20%, and interest rates on some consumer loans have neared 50%. These data show no economic expansion under such conditions.
Dynamics of interest rates in Turkey
Source: Reuters.
The unorthodox approach of Recep Tayyip Erdogan and the central bank he controls has been to ease monetary policy despite inflation accelerating to nearly triple digits. Allegedly, this will deal a blow to usurers and, at the same time, accelerate the GDP. The unwillingness to follow economic theory turned into the deepest currency crisis. Only in 2022 the lira lost a quarter of its value, and the USDTRY reached an all-time high of 19.41 in 2023, and this is not the limit.
The volatility of the Turkish currency against the US dollar has doubled over the past few days, and investors pay the most money for insurance against depreciation of the lira since June, the risks reversals or the difference in premiums between put and call options have reached 13.7%.
Dynamics USDTRY risk reversals
Source: Bloomberg.
Therefore, most experts agree on a bearish outlook for the Turkish lira. JP Morgan believes that USDTRY will rise to 25 even if the central bank moves away from unorthodox policies after the May 14 general election. The bank draws two scenarios for the development of events. The first involves maintaining the regulator’s focus on lowering rates and a gradual rise in the US dollar against the lira to 30 by the end of the year. The second is the rejection of the unconventional policy. In this case, the USDTRY will skyrocket to 24-25 but end 2023 at 26.
In general, the average forecasts of banks for the US dollar versus the Turkish lira fluctuate in the range of 23-25, which is significantly higher than the current levels. The CBRT’s inability to maintain tight capital controls is cited as the main reason. In April, the regulator increased the requirements for contributions to the reserve fund from 25% to 30% for credit institutions with less than 60% of lira deposits. Moreover, according to a Bloomberg source familiar with the matter, the regulator forces banks not to buy foreign currency for their clients in excess of the KKM program. These are the deposits that protect against the depreciation of the lira.
USDTRY trading plan for six months
Strong imbalances in the Turkish economy caused by Erdogan’s unorthodox policies will continue to negatively affect the lira. Regardless of who wins the election on May 14th. The USDTRY target of 19.1, set back in November and then confirmed in February, was reached. I think it makes sense to raise the target to 23 and continue to buy the USDTRY.
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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