Lira extends declines after CPI reading📉

The Turkish lira is failing to halt its ongoing powerful downward momentum (-0.82% against USD today), and the factor that added fuel to the sell-off today was a slightly higher-than-expected CPI inflation reading.

Inflation in Turkey fell to its lowest level since 2021, with consumer prices rising by 39.6% year-on-year in May, slightly lower than forecast (39.2%) and compared to 43.7% in the previous month.  On a monthly basis, inflation was close to zero for the first time in four years.

Despite the good tone of the headline reading itself, investor sentiment is still spoiled by the underlying reading, which no longer shows this downward dynamic. 

Source: Bloomberg via TurkStat

Core inflation surprised analysts with a much higher reading than expected, which, coupled with Erdogan's uncertain policy, puts tremendous pressure on the Turkish lira. Source: Bloomberg

On the other hand, however, and in the matter of Erdogan's policies themselves, we may see some information suggesting a change in the authorities' attitude towards inflation. Mehmet Simsek, Turkey's new Treasury and Finance Minister (and former BofA Merill Lynch strategist), said on Sunday that "the main goal will be to fight inflation rationally". Investment banks also seem to have a different view of the lira. Goldman Sachs predicts a further weakening of the lira against the dollar. On the other hand, Societe Generale recommended a short position on the USDTRY pair in view of the stretched positioning and the high positive carry/aggressive market valuation of the lira's depreciation in futures.

Quotation chart of the USDTRY pair. D1 interval. Source: xStation 5