USD/TRY target range lifted to 7.65-7.75 – Credit Suisse

The lira resumed its weakening against the dollar on Thursday of last week and The USD/TRY pair has continued to march higher so far this week to the 7.49 area. Economists at Credit Suisse have raised the short-term USD/TRY target range to 7.65-7.75 (from a range of 7.50-7.60 previously).

Key quotes

“We raise our short-term USD/TRY forecast range to 7.65-7.75 from a target range of 7.50-7.60. Our new short-term USD/TRY forecast range is roughly in line with the two month to three-month forwards pricing and is deliberately not set aggressively above current levels.” 

“Although lira-investors seem to be disappointed with the central bank’s decision at the end of August to put a halt to the upward creep in the rate at which it funds the local banks, the fact that it had already pushed up that rate substantially in August should ease the depreciation pressure on the lira, especially if the global environment remains generally benign for EM currencies, as we expect it to be.”  

“The central bank still seems likely to meet any further possible weakness in the lira with further FX sales by state-banks and renewed increases in the rate charged for funding to local banks, potentially all the way to the upper end of the interest rate corridor (i.e. 11.25%). We would expect USD/TRY to fall initially to the 7.40 area in case the central bank starts to raise the banks’ funding rate again.”

“In the slightly longer run, the risk to our new USD/TRY forecast remains weighted towards the upside. The selloff in the lira since late last week suggest to us that investors are sceptical about the central bank’s intentions to curb credit growth and to fix its weak net FX position in a structural way; it is also possible that recent weakness in US equity markets spill over forcefully into generalized weakening of investor sentiment towards EM currencies. Following this logic we believe that in order to create meaningful demand for the lira, the central bank would need to deliver further meaningful tightening (e.g. taking its effective funding rate above current year-on-year inflation rate of 11.8%). This degree of policy action is not in our base case, though. Pending such action, the lira will remain vulnerable.”