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Is the Lira well placed to recover?

2:23 PM September 26, 2018


  • Turkish Lira been on of the worst performing currencies this year

  • TRY is undervalued according to REER

  • Hopes for US Pastor’s release could see a recovery


One of the big stories of the year has been the turmoil in Emerging Markets with the space coming under heavy pressure as the USD appreciated and the Fed continued along their path of monetary tightening. The US central bank widely seen as hiking once more this evening and show little sign of altering course. Having said that, there is some suggestion that the large depreciations which culminated for the Turkish Lira last month, when the currency fell 20% in a day are a bit overdone.

The Turkish Lira has endured a terrible year so far, losing almost 40% of its value against the US dollar. Other EM markets such as ZAR and BRL have also been in decline but nowhere near as bad. Source: XTB Macrobond


From a long term perspective the Lira does appear to be extremely undervalued and if Turkey can get a handle on its current deficit and runaway inflation, while not further drawing the ire of the US then a recovery may lie ahead. This remains a major task for the country and the difficulty in achieving it shouldn’t be underestimated but there are some recent signs of promise. Firstly the larger than expected interest rate hike earlier this month is a good step in the right direction to curbing runaway inflation, while also showing at least some degree of central bank independence from President Erdogan.

The Turkish Lira on a trade weighted basis has been in a near constant decline so far this decade in both a nominal effective exchange rate (NEER) and real effective exchange rate (REE) basis. Source: XTB Macrobond

The recent declines have accelerated however, with the REER falling below 2 standard deviations of its mean since 2010. This is clearly extremely undervalued on a historical basis but that doesn’t mean it can’t go further should the currency crisis worsen. Source: XTB Macrobond

Furthermore comments from Erdogan earlier today have raised hopes that US pastor Andrew Brunson will be released - it was his arrest that caused the huge drop in the Lira in mid-August. Erdogan’s remarks that he doesn’t “have the right” to order the release and that the judiciary is “independent” may seem fairly benign to some, but in the context of his authoritarian regime it could well be a case that he is attempting to save face and release the pastor without being seen to publicly back down. A key date to watch out for on this front is October 12th when the Turkish court is expected to announce their decision on Mr. Brunson who has been detained on terrorism charges that look highly dubious.

The Lira has gained today on these hopes with the USDTRY falling back lower. Note the 8 and 21 EMAs have printed a bearish cross which could be seen to indicate the trend has turned lower. 5.98 remains potentially key support and it’s not until this level is broken that the market can make a sustained push lower. Source: xStation



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