News & analysis

The Turkish Lira has been at the forefront of losses in higher-risk EM currencies this quarter, with the recent recovery in the US dollar driving USDTRY to fresh all-time highs amid worsening geopolitical tensions between Turkey and Greece, as well as ongoing concerns about Turkey’s economy.

In addition to geopolitical tensions, CBRT policy, comments from policymakers, and ongoing concerns about Turkey’s economy, as well as wider investor risk appetite trends remain relevant for the lira:

  • Geopolitical tensions between Greece and Turkey have intensified in recent weeks, with Turkish naval vessels sailing in waters claimed by Greece but disputed by Turkey, threatening force if blocked by Greek vessels. Rhetoric has been heated, with President Erdogan stating that Turkey would “take what it is entitled to” and “make no concessions”. Greece’s territorial waters around Cyprus in particular have been the site of recent gas discoveries and developments. Greece and Cyprus have called for EU sanctions on Turkey – a move that would  cripple the already vulnerable Turkish economy. This has likely been the main driver of the recent TRY weakness.
  • The CBRT has avoided raising interest rates in response to the latest wave of lira depreciation. However, various liquidity and credit tightening measures, particularly in offshore markets, have had the effect of raising effective TRY funding rates without formally hiking rates (see chart). So far this has not prevented TRY depreciation.
  • Recent comments from Treasury and Finance Minister Berat Albayrak suggest the Government is not seeking a rally in TRY. Responding to questions from Bloomberg about comments made in August about the lira’s “competitiveness”, Albayrak declined to comment on the exchange rate and instead said that the current account was likely to deteriorate further in the short term. This is in contrast from previous comments from Erdogan blaming Lira weakness on speculative attacks.
  • Our latest forecasts for TRY anticipate further weakness in the short run, with USDTRY rising towards 7.8 amid continued pressure related to the above drivers. Over a 12m horizon, we believe general improvements in the global outlook and risk appetite will see the pair trade down to 6.8.



Turkish effective funding rates rise even as official central bank rates remain unchanged



Author: Ranko Berich, Head of Market Analysis



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