Turkish lira likely to remain stable in near-term, USD/TRY to trade around 7 by March 2020

Yesterday, the Turkish lira rallied alongside CEE peers following Turkey’s central bank’s release of Q4 Inflation Report with optimistic forecasts. The rally was possibly also boosted by investors switching from South African assets, said Commerzbank in a research report.

The Inflation Report continued with the usual practice of depicting falling inflation for the year ahead, without several convincing reasons why this might happen. The CBT had earlier signalled that it might cut its end-2019 inflation forecast, and it did so to 12 percent from 13.9 percent.

However, the latest inflation trend is encouraging mainly due to base-effect. The medium-term outlook has rebounded slightly due to the global downturn and associated low inflation environment; however, there does not appear to be any automatic mechanism by which Turkey will descend to 8 percent inflation in 2020 as the report forecasts. The latest CPI data continue to imply near-14 percent underlying inflation rate even at the low point of the demand cycle.

Meanwhile, September trade data indicated that the seasonally-adjusted trade balance is now deteriorating once again after reaching a high in the summer. The deficit is not broadening especially rapidly, but it is no longer narrowing as the economy picked up in the third quarter.

“This strengthens our concern that while Turkey enjoyed some re-balancing last year when demand was completely crunched after the lira crisis, imbalances will resurface as soon as growth recovers”, said Commerzbank.

Conditions might stay stable for the Turkish lira in the near-term because inflation is moderating and might ease further in October and November. However, fundamental factors are not reassuring regarding the medium-term outlook, especially if CBT were to continue to cut rates.

“We hold an indicative USD/TRY forecast of 7.00 by March 2020”, added Commerzbank.