The currency crisis provoked by Turkish President Recep Tayyip Erdogan is likely to affect the economy negatively. Although official Ankara has bought itself imaginary stability, it is still very far from reality. Let’s discuss this topic and make up a USDTRY trading plan.
Monthly Turkish lira fundamental forecast
The collapse of the lira in recent years is no surprise. But what happened to the Turkish currency in 2021 is breathtaking. It all started back in the spring, when Recep Erdogan fired the head of the central bank, who intended to raise rates to fight inflation. According to the president, the increase in borrowing costs encourages usury and further raises the price level. Perhaps the calls like “this is what Islam demands” make the local population listen to them, but they do not particularly impress foreign investors. They fled the country actively, looking for a decline in the main interest rate amid more than 21% inflation. As a result, the USDTRY price soared to a new all-time high of more than 18 liras, and the Turkish currency fell against the US dollar at the moment by about 80% since the beginning of the year.
Since September, the central bank has cut rates by 500 bps in four meetings, amid high inflation, resulting in a sharp drop in real yields on local bonds, capital outflows and increased demand for hedging lira-related currency risks. Even after extraordinary measures by the Turkish authorities, the country’s five-year credit default swaps remained at a 16-month high. Investors pay more to hedge against Turkey’s default risks than they do for Iraq, which is rated two places lower by Moody’s Investors Service and S&P Global Ratings.
Dynamics of the cost of insurance against defaults
Only large-scale interventions and a plan to compensate for the losses of depositors who keep money in national currency made it possible to stabilize the situation in the country. Net foreign assets fell $5.9 billion in the first two days of the week ending December 24. Lira saw a record gain against the US dollar amid comments from Bloomberg experts that the plan is a hidden aggressive monetary restriction, and the worst period of the Turkish currency is over.
Dynamics of net foreign assets of Turkey
Source: Financial Times.
In fact, the Treasury has assumed a huge foreign exchange risk of about 275 billion. If USDTRY returns above 18, the pressure on the budget will be catastrophic. Ankara will be forced to print new money, which is fraught with another wave of inflation. In fact, Recep Erdogan bought himself an imaginary stability for a while but not a real one.
According to Reuters insider, if USDTRY returns above 18, the government is very hopeful that the pair will soon fall to 9, but understands that a 12-14 range would be good in the current environment.
Monthly USDTRY trading plan
In my opinion, as the Fed raises the rates, the USDTRY price will go up, and no unconventional measures will save the lira. Restoration of investor confidence is good, but investment capital flows determine exchange rates on Forex, and divergence in monetary policy is a sure sign of the strengthening of the US dollar against the Turkish currency. In this regard, the return of the pair above 12.15 and 12.65 is a reason to buy it with a target of at least 15.
Price chart of USDTRY in real time mode
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