TRY Recovery Continues

The Turkish Lira has undergone an impressive recovery over the last few months. USDTRY has now corrected around 18% lower from the all-time highs printed in November 2020. It has been a difficult battle for the CBRT to reverse the tide of TRY weakening which dominated domestic markets last year. Heavy weakness in the US Dollar over the end of 2020 was a key catalyst or the reversal, but swift and aggressive actions by the CBRT also helped foster conditions for a TRY recovery rally.

CBRT In Tightening Mode

The CBRT has been back in tightening mode since November last year, when it hiked rates to 17%, dragging real rates higher with it. Inflation has been creeping higher again since late 2019 moving back up out of single digit lows to current levels around 15%. While still down sharply from the 25% CPI seen in 2018, the upward trend is a big issue for the CBRT and means that, looking ahead, the bank is likely to remain in tightening mode.

Ambitious Inflation Target

In terms of a target, the CBRT has a somewhat ambitious end-of-year inflation target of 9.4%, below what most economists are forecasting. With this in mind, the CBRT looks likely to need to hike rates at least one more time over the remainder of the year. However, the issue for the CBRT is that if interest rates remain at current levels and above, the increase in real rates will start to weigh on the economy. The new governor of the CBRT, Naci Agbal, has set a medium-term inflation target of 5% for 2023, suggesting that further strengthening of the TRY will remain a key priority for the central bank.

Foreign Demand Returning

Another factor supporting TRY recent has been the return of foreign demand for Turkish bonds and equities. Since November 2020, foreign investors have started to return to Turkish markets, albeit at a mild pace so far. However, there is plenty of room for foreign investors to increase their exposure. The CBRT’s new emphasis on adopting a more orthodox and consistent policy approach should help support investor confidence, drawing further inflow for the recovering currency.

Technical Views

USDTRY

USDTRY has hit an important technical juncture. Price is currently sitting on the 7.0104 level which marks key structural support and also the long term bullish trend line from 2018 lows. While this level holds, the longer term trend could still continue higher. A break here however, could mark the start of a deeper reversal lower, with 6.6938 the first downside level to mark next.

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