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

Analysts at MUFG Bank explained that the weakness seen in the Turkish lira is starting to stand out again amongst Emerging Market currencies. They see the USD/TRY moving to the upside over the next months, forecasting it at 18.000 by year-end. 

Key Quotes:

“The lira has resumed its slide against the US dollar bringing an abrupt end to the recent period of relative stability from mid-March to early May. Turkey’s weak economic fundamentals have been exacerbated by the negative fallout from the Ukraine invasion leaving the lira even more vulnerable to another sharp adjustment lower.”

“Headline inflation had already surged to 70.0% in April, with PPI elevated at 122%. There has been no indication that the CBRT is willing to act to tightening policy to dampen upside inflation risks. The sharp rise in inflation has resulted in the CBRT’s real policy rate moving deeply into negative territory. The lira is now very vulnerable to a further sharp adjustment lower. It stands in contrast to the hawkish shift taking place globally.”

“Turkey has limited scope to support the lira through intervention reinforcing the bearish trend. The sharp depreciation of the lira in May will bring into focus the unsustainable FX-protected deposit account scheme that will increase costs for the government as the lira weakens and will prove counter-productive in only fuelling heavier lira selling. We have therefore lowered our TRY forecasts notably through to Q1 2023.”