Can the Turkish lira regain support?


What’s next for the Turkish lira

While major
currencies draw a lot of attention these days, it may be worth keeping a broad
view of the market. If we start looking for profit opportunities elsewhere, the
Turkish lira will come up soon. What’s happening with the TRY and is it fit for trading?

During September
and the beginning of October, the lira was rather stable versus the USD.
USD/TRY kept returning down to the support at 5.63, while the upside was
limited by the 100-day MA. This week, however, the lira has experienced a
selloff, the pair jumped above the mentioned moving average and got to the
highest levels since the end of August in the 5.88 area.

Fight for the lira

For many months,
Turkish state banks have been holding the advance of USD/TRY by selling
dollars. According to Bloomberg, in March they sold between $10 billion and $15
billion ahead of the municipal elections.

On Monday, the
lira took a blow after Turkey began a military offensive into northeastern
Syria. The banks intervened when USD/TRY was around 5.84/5.85 and sold about
$1-3.5 billion during the past few days. However, this wasn’t enough to negate
political risks:

President Donald Trump said that the United States will “obliterate” Turkey’s
economy if it did anything he considered “off-limits.” Although Trump later
said that Turkey was a “big trade partner” of the US, USD/TRY stayed
above 5.80. 

TRY chart

It’s evident that
the resources of any central bank aren’t endless and the Turkish central bank
is no exception: it obviously won’t be able to support the lira by selling
reserves during an extensive period.

If tensions
between the United States and Turkey keep escalating, the regulator might have
to consider rate hikes to stop the fall of the TRY. This, however, is against what
President Recep Tayyip Erdogan has in mind.

Economy and monetary policy

Turkish economy
is going through hard times: it experienced the first recession in a decade. To
restore growth, the Turkish central bank has slashed borrowing costs by 7.5
percentage points since July. The looser monetary policy is endorsed and
promoted by President Erdogan.

The next meeting
of the central bank will take place on Oct. 24. Although Governor Murat Uysal
sounded cautious about further action, a rate cut this month is still likely
given the decline in inflation.

Notice that
Turkey’s benchmark rate is currently at 16.5%. If we adjust this rate for
inflation, it will still be higher than in most emerging markets. This, in
turn, means that, despite the rate cuts, the TRY may still be attractive for
those who hunt for yields and are willing to bear the immense country risk.

Notice that the
International Monetary Fund has recently revised up its growth forecasts for
Turkey. According to the IMF, fresh stimulus including an expansionary fiscal
policy can make the GDP growth rebound by 0.25% instead of a previously
projected 2.5% contraction by the end of 2019.

Despite this ray
of sunshine, Turkey’s position remains very fragile. A continuation of the
invasion to northern Syria can lead to the US sanctions – something the Turkish
economy will have a really hard time dealing with.

S&P Global
Ratings has warned that the military deployment raised risks for the lira and
Turkey’s balance of payments: all the progress made during the recent year may

If you monitor
the TRY, keep your eyes open for the news: Erdogan will visit Washington on
November 13 and the market may put some hopes in the TRY ahead of the meeting,
though the future will, of course, depend on its outcome.


As you can see,
the situation for the TRY looks nasty and difficult. Rate cuts and military
action will continue keeping the currency under negative pressure. On the
bright side, the relations between the United States and Turkey look better
than they did a year ago (merely because back then they were outright terrible)
and interest rates in the country are still high.

As long as things
don’t escalate from this point, the fall of the lira shouldn’t be extremely
steep. As a result, the advance of USD/TRY may be limited by 5.90/95. The next
key resistance lies at 6.00. Support, in turn, is located at 5.80 and 5.70.

The bigger
picture will change in favor of the TRY only if Turkey conducts fundamental
economic reforms or reaches a trade deal with the United States. With those
things unlikely soon, USD/TRY will trend to the upside.

This article was
submitted by FBS.


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