Turkish Lira’s Wild Ride Has Banks Axing Forecasts for Guesswork
(Bloomberg) -- Making predictions in emerging markets has always been a tough job. For Turkey, it’s become near impossible.
Bank strategists tore up their bullish lira forecasts this week after President Recep Tayyip Erdogan fired the head of the central bank, and now are largely in the dark on where the currency goes next. Some are using past crises as a guide, while others are watching for evidence that the central bank is propping up the currency and studying the swaps market.
The difficulty is that even though Governor Sahap Kavcioglu has pledged to deliver price stability, analysts say he’s likely to follow the wishes of Erdogan and start lowering interest rates at some point. The lira was the biggest decliner in emerging markets on Friday.
Policy U-turns and the risk of more upheaval mean currency predictions are largely guesswork. If there’s one thing analysts agree on, it’s that the lira is likely headed lower: Societe Generale SA, Commerzbank AG and Rabobank all see the currency dropping around 20%.
Commerzbank says its year-end lira forecast of 10 per dollar is purely “symbolic. It’s just a way of labeling the probability of “spiraling lira weakness,” said Ulrich Leuchtmann, head of currency strategy in Frankfurt. “We find it impossible to identify a precise break point.”
Erdogan fired Kavcioglu’s market-friendly predecessor in the early hours of Saturday, a shock move that sent the lira down as much as 15%. The new governor has previously expressed support for the president’s unorthodox stance that high rates provoke inflation.
But what action he ultimately takes is uncertain. On Wednesday, the monetary authority’s new management pledged continuity in policy and to maintain the current operational framework, state news agency Anadolu reported, citing a meeting between the monetary authority and commercial lenders on Wednesday.
The lira retreated 2% versus the dollar to 8.0963 as of 2:20 p.m. in New York on Friday. That put it on track for a weekly slump of 10.9%, its sharpest depreciation since the height of the August 2018 currency collapse.
Phoenix Kalen, SocGen’s London-based director of emerging markets strategy, envisages a scenario where the lira keeps falling over the coming months, ultimately forcing policy makers to step in with “aggressive policy action” after a drop of between 20% and 40%. She sees the lira down about 18% at 9.7 per dollar at the end of the second quarter.
Wells Fargo took a similar step, shifting expectations for the lira per greenback to 9 by year’s end amid heightened policy uncertainty, a forecast that New York-based strategist Brendan McKenna said had “a lot of guesswork involved.” Before the events of the past week, the firm had its end-of-year forecast at 7.50, he said.
Henrik Gullberg’s strategy is to study the history of the lira going back to 2011. The London-based macro strategist at Coex Partners Ltd. predicts a drop to 9.25 within the next six months, at which point the central bank will hike rates.
During the lira’s last bout of weakness last year, Turkey spent more than $100 billion of foreign reserves to support the currency, according to a report by Goldman Sachs Group Inc. That’s why Per Hammarlund, chief emerging-markets strategist at SEB AB in Stockholm, is watching for signs of intervention to plot the lira’s trajectory.
He’s looking at the swaps market and the difference between the central bank’s foreign assets and liabilities. He sees the lira hitting 8.50 within a month, before depreciating at a similar pace as inflation, which would imply levels of around 9.10 to 9.20 in 12 months.
“As analysts, we face an extraordinarily high degree of uncertainty regarding the shape of future policy,” SocGen’s Kalen said. The new governor is “relatively unknown,” she said.
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