USD/TRY price analysis: Where is the limit?
16:11, 2 December 2021
The Turkish lira (TRY) is in the midst of turmoil, having lost about half its value since the beginning of the year, the worst performance among emerging market currencies.
The USD/TRY exchange rate has risen by 38% in the last month alone, due to President Recep Tayyip Erdoğan’s persistent involvement in the country's economic policies, which has caused a complete erosion of credibility among investors.
This not new. Erdoğan has never hidden his sympathy to reduce the country's borrowing costs in the past, even in the face of a rampant inflation, contrary to what conventional economics would suggest.
However, recent developments seem to have brought the Turkish lira to a tipping point.
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A timeline of the Turkish lira collapse
- On 23 September, the Central Bank of Turkey (CBT) dropped its benchmark interest rate by 100 basis points (bps) to 18%, in response to President Erdoğan's calls for lower interest rates, and despite a 19% inflation rate. Policymakers justified their decision by arguing the central bank had little control over the direction of headline inflation, which was constrained by global supply chain disruptions, and that it should instead focus on core prices (which exclude energy and food). USD/TRY edged 1.3% up on the day to 8.75.
- On 21 October, CBT cut its policy rate by 200bps to 16%, bucking market expectations of a 50bps reduction. USD/TRY gained 3% on the day to 9.50.
- On 17 November, one day before the central bank meeting, President Erdoğan stated that he will continue to campaign for lower interest rates, citing religious precepts on the need to ease the burden of interest rates on citizens. USD/TRY rose 2.5% on the day to 10.60.
- On 18 November, CBT slashed further its key policy rate by 100bps reiterating that supply side factors – such as rise in food and import prices, especially in energy – are “beyond monetary policy’s control”. USD/TRY climbed 4.4% to 11.08.
- On 22 November, the Turkish lira suffered the worst session of the year, losing as much as 15% against the dollar, as President Erdoğan once again defended recent rate cuts and declared Turkey to be in an “economic war of independence”. USD/TRY hit 13.45, before closing the day at 12.80.
- On 2 December, President Erdoğan abruptly replaced his finance minister amid disagreements over economic policies, by appointing Nureddin Nebati, who is perceived to be a close ally of former economy minister Berat Albayrak, Erdoğan's son-in-law, who previously backed the president's low-interest-rate stance. USD/TRY increased 1.7% to an all-time high of 13.45.
USD/TRY fundamental analysis
Recent positive economic developments including the expansion of Turkey's manufacturing purchasing managers' index for a sixth consecutive month and gross domestic product (GDP) increasing 7.4% year on year in the third quarter of 2021 have been unable to provide any respite to the lira's uncontrollable decline.
Price actions on USD/TRY has remained exceptionally volatile and inextricably related to Erdoğan's intent and policy statements.
From a fundamental point of view, the Turkish lira provides a real negative rate of around 5%, since inflation is at 20% while interest rates are at 15%, a tangible reason why its appeal has plummeted among investors. It is among the lowest real rate among major emerging markets.
|CURRENCY||POLICY RATE||INFLATION RATE||REAL RATE|
|INDONESIAN RUPIAH (IDR)||3.5%||1.75%||+1.25%|
|INDIAN RUPIAH (INR)||4%||4.48%||-0.48%|
|RUSSIAN RUBLE (RUB)||7.5%||8.13%||-0.63%|
|MEXICAN PESO (MXN)||5%||6.24%||-1.24%|
|SOUTH AFRICAN RAND (ZAR)||3.75%||5%||-1.25%|
|BRAZILIAN REAL (BRL)||7.75%||10.67%||-2.92%|
|TURKISH LIRA (TRY)||15%||19.89%|
Data: Koyfin, as of 2 December 2021
Meanwhile, the position of the central bank's foreign reserves continues to deteriorate.
Turkey's central bank intervened in the foreign currency market on Wednesday, selling about a billion dollars of its foreign reserves to help the lira.
According to the most recent data given by CBT, gross foreign currency reserves stood at $79bn as of end-November, including $54bn coming from currency swap deals with other central banks. After deducting swaps and other obligations, such as required reserves, Turkey's net reserves stand around negative $30bn.
Turkey's central bank will meet on 16 December to decide on interest rates.