USD/TRY likely to trade at 3.20 by end-2016; rising political risks pose serious concern, says Commerzbank

The USD/TRY currency pair is expected to trade at around 3.20 by the end of this year, which is now at risk of being overshot in the near-term, following a series of fresh political crisis that took hold.

A resistance movement against the AKP government by Kurdish segments in southern Turkey resulted from the already-brewing political intensity. This was an especially dangerous development because public protests are banned during emergency rule, but Kurds had chosen to defy this and hold large-scale protests, risking police retaliation at every stage.

On Friday, the crisis intensified after the co-leaders of Kurdish HDP, Selahattin Demirtas and Figen Yuksekdag, were arrested along with ten other HDP MPs on the allegation that they had refused to testify against Kurdish terrorists who are being prosecuted. They would most likely lose their MP status if the final court hearing testifies them to be jailed.

Naturally, the Kurdish electorate as well as parts of the media, view this as President Recep Tayyip Erdogan's attempt to take control and remove obstacles preventing a Constitutional referendum and executive presidency. EU leaders also warned on Friday that these arrests are sending out a chilling message regarding the breakdown of democracy in Turkey.

"We ourselves have maintained that a move to an executive presidency should be priced in by investors that Turkey's risk premium should reflect such an outlook. In this sense, we do not see the situation reversing or calming down in coming days," Commerzbank commented in its latest research report.