TRY: Reversal all over again – Commerzbank

The situation surrounding the Turkish lira is, once again, deteriorating, Commerzbank's FX analyst Tatha Ghose notes.

USD/TRY to drift up steadily over the coming quarters

"After political turmoil broke out in March and the currency depreciated, the central bank (CBT) raised rates twice, and it had briefly appeared hopeful that the FX market might view it as a positive that the central bank was willing to raise rates, including the main repo rate. But, the policy move did not have much lasting positive impact after all: USD/TRY began to creep back up shortly after. We attributed this to the flip-flopping of monetary policy which probably dented the central bank’s credibility all over again."

"Inflation expectations have begun to deteriorate again. This had been forewarned by Reuters and Bloomberg surveys earlier in March. Household inflation expectations now stand at 59.3% (April); the 1-year forward inflation expectation of market participants accelerated to 25.6%, while businesses are forecasting 41.7% inflation. This is not good news."

"It now looks very much like the central bank and state banks are back at intervening to defend successive lines of defense, even while the exchange rate breaks each such level and moves to the next. This probably means that CBT is, once again, haemorrhaging reserves. We expect USD/TRY to drift up steadily over the coming quarters."