World-Leading Lira Rally Turns Bank Analysts Into Bulls


The Turkish lira’s hot start to 2021 is even winning over some skeptics who are betting on further gains in the months ahead.

The currency has jumped a world-leading 23% against the dollar since President Recep Tayyip Erdogan overhauled his economic policy team in early November. That shakeup buoyed investor optimism that Ankara would take a more orthodox approach to managing one of the Middle East’s largest economies.

Analysts at Societe Generale SA and HSBC Holdings Plc predict the advance isn’t over just yet. They say the lira will rally to 6.5 per dollar by year-end, signifying a 7% increase from its current level. The thinking is that Turkey’s dwindling foreign-exchange reserves may dissuade Erdogan from intervening on monetary policy for now. Recent interest-rate hikes and the prospect of inflation remaining in the double digits add to their bullish backdrop.

World-Leading Lira Rally Turns Bank Analysts Into Bulls

With the government facing high short-term financing needs, “there is much less room for Turkey to maneuver than in prior years,” said Phoenix Kalen, the London-based director of emerging markets strategy at Societe Generale. She said the pace of gains will probably slow down.

Last year, Turkish banks spent more than $100 billion of the nation’s foreign reserves to support the sinking currency, according to a report by Goldman Sachs Group Inc. Central bank Governor Naci Agbal has signaled a desire to rebuild that stockpile. He said Turkey will maintain a tight monetary policy stance until the country meets its inflation target in 2023, a pledge aimed at easing concern of premature interest-rate cuts.

Resistance Level

Still, a regression analysis presents a word of caution to the bulls. It shows the dollar-lira pair mostly traded within one standard deviation above or below its regression line this past decade. The latest gains brought the currency below the upper band, suggesting another massive rally could be harder to attain.

World-Leading Lira Rally Turns Bank Analysts Into Bulls

Some analysts also warn it’s just a matter of time before Erdogan returns to his old ways, halting the lira’s advance in the process.

Erik Meyersson, a Stockholm-based senior economist at Handelsbanken, said there’s nothing to stop the president from pressuring the central bank to lower rates prematurely, as he did in 2014 and 2019. Since the shuffle in November, Erdogan has reiterated his distaste for high borrowing costs.

The monetary authority will hold its next meeting on Thursday. Policy makers are expected to keep the benchmark interest rate at 17%, according to the median estimate of 25 economists surveyed by Bloomberg.

Erdogan Economy Aide Warns Against Pursuing ‘Hot Money’ Policy

Until that day of reckoning, the lira could get extra support from improving risk appetite, according to Henrik Gullberg, a London-based economist at Coex Partners, who successfully predicted its so-called ‘pain threshold’ just before the rally. He said valuations could become stretched if the currency climbs to 6.85 or 6.9 per dollar, though there’s the potential for a brief overshoot to 6.3.

“If the broader environment remains supportive of risk sentiment, which I believe it will be, and the CBRT is allowed to maintain its more conservative policy approach then I think the lira will continue to appreciate,” Gullberg said.

©2021 Bloomberg L.P.

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