What’s been driving the USD/TRY rate in 2021, and what’s the dollar to lira prediction as we head into 2022? In this article we look at the latest analysts’ USD/TRY forecasts and what to consider when trading the USD against the TRY.
USD/TRY analysis: where is the pair now?
USD/TRY news has managed to grab the headlines through 2021, despite not being a heavily traded currency pair. Early in the year, Turkish President Recep Tayyip Erdogan’s moves to dismiss the leadership of the Central Bank of the Republic of Turkey (CBRT) put extreme pressure on the Turkish lira. Recent actions against diplomats of Western countries and the CBRT announcing a shock cut in interest rates has pulled the currency down further.
From the beginning of the year to 26 October, the Turkish lira has weakened by nearly 23% as the USD/TRY exchange rate climbed from about 7.28 to 9.47.
The currency’s downward spiral has led many to ask: will the Turkish lira recover?
USD/TRY technical analysis
Current market sentiment for the pair reflects the unpredictability of Turkish decision making. The central bank’s rate cuts amid rising inflation has experts worried that fundamentals of monetary policy are being overlooked because of political pressure.
At the time of writing (26 October), data from Capital.com shows trader sentiment at 64% bullish and 36% bearish. The data is calculated automatically, based on open positions for USD/TRY on the platform and should not be considered an incentive to trade the asset.
According to a recent report by Commerzbank, cited by FXStreet, the USD/TRY exchange rate is expected to climb to 10.00, where it will face resistance. However, if it doesn’t stall, it may rise further. On the other hand, support could be seen at early October’s low of 9.20.
USD/TRY forecast: key fundamental drivers
The Turkish lira has a history of being marred by instability and volatility. First introduced in 1923, the currency was revalued in 2005 following an economic crisis in 2001, which led to the devaluation of the old Turkish lira.
Even as recently as 2018, the currency plunged 20% in a single day because of geopolitical factors and President Erdogan’s frosty relationship with Western leaders.
The recent history thus shows that political developments in Turkey have a huge bearing on the currency and are often the key drivers of the TRY’s movements.
The USD on the other hand closely tracks developments in the US economy. It is also a key safe-haven currency which investors flock towards at the earliest signs of risk in the global economy.
USD/TRY prediction: what are the analysts saying?
Analysts’ USD/TRY expectations indicate that the Turkish lira will continue to lose ground for at least a couple of years. Per Hammarlund, chief EM strategist at Skandinaviska Enskilda Banken, expects USD/TRY to rise to 10.20 by the year end and hit 12 by the end of 2023.
“The largest threat to TRY and to investors is capital controls. However, while additional taxes and measures to reduce TRY liquidity and discourage capital outflows are possible, we think that the authorities are highly unlikely to impose strict capital controls preventing foreign investors from bringing home profits, repaying foreign debt, or selling financial assets. Turkey needs a steady inflow of capital to service its foreign debt, and capital controls would cause those to dry up. Although capital controls cannot be fully ruled out, history shows that Erdogan and his administration are more likely to hike interest rates than to restrict capital flows.”
Hammarlund’s opinions about the unpredictability of the Turkish lira are not isolated and explain why a long-term USD/TRY analysis is difficult.
“It is very difficult to give long-term forecasts of the USD/TRY simply because it is difficult to read Erdogan’s mind and which way Turkish policies move,” a currency strategist at a leading global bank told Capital.com. “Sound economic and monetary policy suggest interest rates go up when inflation rises, but Turkey has taken an unorthodox approach. It is difficult to predict when it sheds that approach or how much it is willing to let its currency slide. But one thing is certain, more rate hikes by the CBRT will lead to more depreciation of the Turkish lira.”
According to Joseph Marlow, assistant economist at Capital Economics, the Turkish central bank is expected to cut policy rates by a further 400 basis points by the middle of next year. However, that alone is not the reason why Capital Economics expects the Turkish lira to slide for two more years.
When looking for USD/TRY predictions, it’s important to bear in mind that analysts’ forecasts can be wrong. Analysts’ projections are based on making a fundamental and technical study of the currency pair’s performance. However, past performance is not a guarantee of future results.
Do your own research and always remember your decision to trade depends on your attitude to risk, your expertise in this market, the spread of your investment portfolio and how comfortable you feel about losing money. And never invest more than you can afford to lose.
Key facts about USD/TRY pair
The US dollar (USD) to Turkish lira (TRY) exchange rate shows how many TRY are needed to buy one USD.
The TRY, or the Turkish lira, is the official currency of Turkey and Northern Cyprus. The lira is not a highly traded currency and has a share of just 1.07% of all forex transactions, even though the country’s gross domestic product (GDP) is the world’s 19th largest.
The US dollar on the other hand is the world’s reserve currency and it has been so ever since the end of the gold standard in 1971. Being the reserve currency, the US dollar is the most traded currency in the world.
The old lira was devalued in 2001 and the new Turkish lira was revalued in 2005. The current inflationary environment has sparked fears of another period of economic turmoil in the country.
While it is possible to trade EUR/AUD 24/7, the best hours to trade the pair are when they experience higher volumes – typically around major market announcements. Turkey’s announcements are usually made during European market hours while US data is released in the mornings.
The outlined expert views suggest the TRY to depreciate for at least two years or at least until the central bank starts following the conventional path of raising policy rates to tackle inflation. Whether you buy or sell is your decision. Always remember that your decision to trade depends on your attitude to risk, conducting your own research and the spread of your investment portfolio.
The difference between trading assets and contracts for difference (CFDs)
The main difference between contracts for difference (CFD) trading and trading assets, such as FX pairs, commodities and stocks, is that with CFDs you don’t own the underlying asset.
You can benefit if the market moves in your favour or make a loss if it moves against you. However, with traditional trading you enter a contract to exchange the legal ownership of the individual shares or the commodities for money, and you own this until you sell it again.
CFDs are leveraged products, which means both profits and losses can both be magnified. With CFDs, you only need to deposit a percentage of the full value of the trade in order to open a position. But with traditional trading, you buy the assets for the full amount. In the UK, there is no stamp duty on CFD trading, but there is when you buy stocks, for example. Make sure you understand how CFD trading works before investing.
CFDs attract overnight costs to hold the trades (unless you use 1:1 leverage), which makes them more suited to short-term trading opportunities. Stocks and commodities are more normally bought and held for longer. You might also need to pay a broker’s commission or fees when buying and selling assets directly, and you’d need somewhere to store them safely.