Jun 23, 2023

The Turkish Lira has slumped to a new low against the US dollar, but bank analysts warn of worse to come.

USDTRY: Monthly Chart

USDTRY: Monthly Chart

The USDTRY monthly chart highlights the damage done to the Turkish currency, which traded at 4:1 against the US dollar. Soaring inflation, central bank turmoil, and economic stress now see the pair at almost 25:1.

In the first rate-setting meeting after new Governor Hafize Erkan took over, the Monetary Policy Committee increased its benchmark rate to 15% from 8.5%, the first rate hike in over two years.

Reuters noted recently that the Turkish central bank’s net forex reserves slumped into negative territory for the first time since 2002. The situation for the Lira worsened ahead of the Presidential vote and increased demand for currencies such as the USD and gold.

Morgan Stanley said near the election vote that the Lira would weaken further and that the USD/TRY could reach 26 by the end of the year. “The risk is that this level is reached sooner, with a higher USD/TRY level by the end of the year, closer to 28, absent a change in policy direction, particularly on interest rates.”

“Without a change in the macro policy framework to prioritise disinflation and to adopt market-friendly policies, Turkey’s high external finance needs will likely keep macro risks alive, increasing sensitivity to global shocks (commodity prices, Fed) as well as the availability of FX inflows from regional partners.”

Turkey’s inflation rate is now around 40%, up from near 10% in 2021 but down from the over 80% level seen ahead of this year. The Lira looks set to deteriorate further unless the central bank takes serious action.

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