The beginning of the month was quite eventful for the Turkish lira. However, this week it started to lose its volatility. What is happening?
USD/TRY: near-term fundamentals and technical levels
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Turkish lira is the currency that was worst hit after Fed increased its interest rate on March 15 mainly because of country’s distorted current account data and low domestic policy credibility. After the massive downfall, TRY moved into the consolidation phase. At the present, USD/TRY is trading in a range of 3.6620 – 3.6250 (50- H4 MA).
Most likely the currency pair will continue its corrective movement in the near-term being driven by US dollar fundamentals. If investors renew their hopes for Trump pro-growth policies, USD will easily regain its strength across the board. And the lira might suffer significantly.
The key event of the next month is the Turkish referendum on a proposal to reshape Turkey’s current political system by abolishing the post of prime minister and offering President Recep Tayyip Erdogan broad executive powers. It will be held on April 16. The best result for TRY would be a “yes” vote as markets associate it with the maintenance of political status quo and formalization of Erdogan’s role. De facto the current Turkey’s political system is presidential widely supported by the ruling AK Party (Erdogan is a formal party leader). So, handing more powers to Erdogan would be mean “no change” in market’s language. A “No” vote would be more destabilizing for markets as it would lead to the continuation of the debate on Erdogan’s legitimacy. The investors will probably start to sell on the concerns about the results of the upcoming election (the probability of the win of opposition party will increase).
Supporters of the introduced constitutional changes believe that offering Erdogan broad authority is the only way to achieve the political stability need for concentration on the economic reforms (that are so needed for the salvation of staggering economic growth of the country). A yes vote could strongly support the lira at for a short period of time. The central bank’s tightening measures don’t facilitate the nation’s currency valuation, neither they help to lower rising inflation rate. So far, they failed to affect bank’s lending to consumers and businesses.
Another Achilles’ heel of Turkish lira is distorted trade balance data that is almost irreparable for a score of reasons. Turkey’s trade deficit is the biggest of all top 50 economies relative to output and the biggest problem is that most of the Turkish imports and foreign debt are priced in US dollars.
In the short term, USD/TRY will probably continue trading within the narrow range of 3.6260 – 3.6550. If the US dollar manages to regain its recent strength (least seen when investors were betting on Trump’s pro-growth policies), the quotes will rise towards 3.6660 (100-H4 MA). On the downside, there are several supports at 3.6260 (50-H4 MA) and 1.5845 (March 27 low).
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