USD/TRY: Ukraine conflict reinforces downside risks for Turkish lira – MUFG

The Turkish lira has come under renewed selling pressures over the past month driven by the negative impact of rising geopolitical tensions between Russia and the West, explained analysts at MUFG Bank. They see USD/TRY trading in the 13.000-15.500 range during the first quarter and at 13.100-16.500 during the second quarter. 

Key Quotes:

“The Ukraine conflict will have a negative impact on lira stability through security risks in the region and higher energy prices.”

“The higher oil price if sustained is an unfavourable development for Turkey’s trade and current account balances as it will raise the imports bill.”

“The higher price of oil will further increase upside risks to the inflation outlook in Turkey. The latest CPI report worryingly revealed that headline and core inflation had already picked up to 48.7% and 39.5% respectively in January.”

“We continue to believe that domestic policy settings remain too loose which is increasing the risk that higher inflation will become embedded in the economy and further erode the value of the lira going forward. There has been no indication yet that the CBRT will shift to more orthodox policy settings in Turkey.”

“Recent lira stability has been supported by government actions including to slow dollarization in Turkey’s economy, direct intervention in the FX market, and to boosting reserves through a USD5 billion FX swap with the United Arab Emirates.”