USD/TRY: Moderate increase in the long-term - Danske Bank

Analysts at Danske Bank, see the TRY stabilizing in the medium term and a moderate rise in the USD/TRY in the long term. 

Key Quotes: 

“Turkish GDP growth slowed to 5.2% y/y in Q2 18, from 7.4% y/y a quarter earlier. Industrial production growth continues to slow down as manufacturing PMI index stays under 50.0. Turkey’s central bank’s (TCMB) sharp monetary tightening is set to pose additional brakes on economic expansion in the long term. We expect 2018 GDP to grow 3.5% y/y, cutting 2019 GDP growth projection to 2.6% y/y (previously 3.0% y/y).”

“Net flows into Turkish bonds continue to be negative, starting from mid-July 2018 on the TRY’s turmoil and fears of a worsening fiscal position. According to technical analysis (Relative Strength Index), the USD/TRY is returning to ‘the fair value’ after the significant hike.”

“Major downside risks to our TRY forecasts include further geopolitical escalation and a deepening trade war between Turkey and the US. TCMB’s passive stance in the situation of the current currency crisis could be another downside risk for our TRY view. While we exclude the IMF programme scenario for Turkey, a sudden change in President Recep Erdoğan’s opinion towards the IMF and improving dialog with the US would support the TRY.”

“We raise our USD/TRY forecast levels. However, we see TRY stabilising in the medium-term with more volatility set to arise if the Fed delivers more hawkishness on 26 September. Given we expect more tightening by the TCMB (both implicit and explicit), we see a moderate increase in the USD/TRY in the long term. However, we continue to remain bearish on the TRY in the long term, expecting USD/TRY at the following levels: 6.00 (previously 5.40) in 1M, 6.40 in 3M (previously 5.90), 6.90 in 6M (previously 6.20) and 7.50 in 12M (previously 6.70).”