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The central bank saved the lira once, and the Turkey’s president saved it for the second time. Investors became concerned after Recep Erdogan’s party lost in the municipal elections and began purchasing USDTRY. Let’s talk about this topic and make up a trading plan.
Monthly fundamental lira forecast
Some people long for the past, while others try to forget it like a nightmare. For Turkey, returning to Recep Erdogan’s unorthodox economic policies of the past would be a disaster. For a long time, the president insisted that the only way to fight high inflation was to lower interest rates. However, this approach proved ineffective, and the country eventually returned to conventional economic theory. Meanwhile, the recent municipal elections have hurt the USDTRY exchange rate.
The opposition has come to power in many major cities. The USDTRY pair managed to move away from all-ime highs only after Recep Erdogan stated that lessons should be learned from the defeat, giving the central bank and the government more time to implement their goals and assuring that the effects of their programs will be seen in the second half of the year.
Despite a 4,150 bp increase in the key rate since the start of the monetary restriction cycle, inflation in Turkey shows no signs of slowing down. In March, the consumer price growth rate increased to 68.5% from 67.1%, slightly below the 69.1% expected by Bloomberg experts. Core inflation reached a record high of 75.2%. The main reasons cited were the sharp increase in the minimum wage at the beginning of the year and the stability of service prices.
Turkish inflation rate
Source: Bloomberg.
Meanwhile, the Bank of Turkey predicts that CPI will decrease to 36-42%, and investors appear to share this view. Since the rate hike began, they have purchased $4.9 bn in local bonds. The sudden tightening of monetary policy in March caused borrowing costs to surge by 500 bps to 50%, and Recep Erdogan’s acknowledgment of defeat in municipal elections resulted in USDTRY pullbacks.
Markets rumor that if the president returns to unorthodox policies, the pressure on the lira would be immense. Compared to previous years, foreign exchange reserves have been depleted, and the central bank has no means to support its own currency’s exchange rate. According to Goldman Sachs, if the vote is not revised as it has been in the past, USDTRY bears will receive preferential treatment due to Ankara’s continued emphasis on traditional monetary policy.
The lira is currently the weakest currency among over three dozen of the most liquid currencies on Forex due to highly negative Turkish debt rates. However, as inflation slows towards 36-42%, real yields will rise, creating an opportunity for USDTRY bears to act in the market.
Monthly USDTRY trading plan
However, the USDTRY pair’s trajectory will depend on how many times the Fed will cut the federal funds rate in 2024. If the data on US inflation for March shows further acceleration, the Turkish lira will not be able to withstand the US dollar. In this scenario, consider opening long trades with the target at 33.1-33.2.
Price chart of USDTRY in real time mode
The content of this article reflects the author’s opinion and does not necessarily reflect the official position of LiteFinance. The material published on this page is provided for informational purposes only and should not be considered as the provision of investment advice for the purposes of Directive 2004/39/EC.
