Turkey: USD/TRY outlook for 2H16 - MUFG

Lee Hardman, Currency Analyst at MUFG, notes that the Turkish lira has stabilized at weaker levels fluctuating within a relatively narrow range against the US dollar between the 2.8000 and 3.0000 levels for the majority of the first half of this year.

Key Quotes 

“It stands in marked contrast to the Turkish lira’s performance during last year when it declined sharply resulting in USD/TRY rising from around the 2.3000-level to just over the 3.0000-level. The performance of the Turkish lira has been broadly consistent with emerging market currencies in general which have traded on a firmer footing so far this year.

2H16 Outlook

We expect the Turkish lira to weaken modestly in the second half of this year lifting USD/TRY towards the top of the current trading range between the 2.8000 and 3.0000 levels. It fits with our outlook for further modest broad-based US dollar strength. We expect the US dollar to derive support from higher US yields in the second half of this year. We believe that the market has now gone too far in scaling back Fed rate hike expectations. The US economy is moving closer to full employment and wage growth is accelerating. If the US economy proves more resilient than currently feared it will provide scope for the US dollar to strengthen. Drags on the US economy from previous US dollar strength and the sharp decline in the price of oil which has hit capital investment hard should gradually ease.

We expect domestic political risk to remain a weight on the lira. Further concrete political steps towards implementing a Presidential system including calling a referendum have the potential to weaken the lira as evident in May.”