Direction of TRY awaits coalition negotiations

USD/TRY has remained stable at 2.73 in recent times following its sharp jump after the 7 June election weekend. Uncertainty regarding the political outcome is a negative for the lira. But this is counter-balanced by a greater capacity for central bank to independently raise rates. The status quo is likely to continue through end-June, states Commerzbank.

In late June, official election results will be out; then President Erdogan will mandate AKP leader and ex-PM Davutoglu with forming a coalition government. Right now, all coalition scenarios are possible. The smaller parties are making strong demands of AKP, including side-lining their de facto leader, President Erdogan, and re-opening investigations on a host of ex AKP ministers. 

At the same time, a minority CHP-MHP-HDP coalition appears also to be ruled by nationalist MHP's refusal to cooperate with Kurdish HDP. The strong positions being adopted by these parties is increasing the probability that "early elections" will be the only option. The situation is fluid and changing daily, so this may turn around, but for the moment, there is narrowing room for optimism, observes Commerzbank.