USD/TRY: Stronger US dollar to weigh on lira - Danske Bank

Analysts at Danske Bank, remains bearish on the Turkish lira but they lowered USD/TRY forecast on the back of currency stabilization and diminished standoff in the tension between Turkey and US. 

Key Quotes: 

“Turkish GDP growth slowed to 5.2% y/y in Q2 18 from 7.4% y/y a quarter earlier. Industrial production growth continues to slow down as the manufacturing PMI index remains well below 50.0. Turkey’s central bank’s sharp monetary tightening is set to put additional brakes on economic expansion in the long term. We expect 2018 GDP to grow 3.5% y/y, while we cut our 2019 GDP growth projection to 2.6% y/y (previously 3.0% y/y) when we see increased risk of a technical recession.”

“Turkey’s central bank (TCMB) kept the one-week repo rate at 24.00% in October with the TRY stabilising and starting to gain on the rapidly improving geopolitical environment as the country returned to a mutually positive dialogue with the US. The latest inflation print pushed real rates under zero, which keeps the risk of a rate hike on 13 December elevated. However, if inflation decelerates to below 25.00% y/y in November, the TCMB would keep rates unchanged until
Q2 19, we believe.”

“Major downside risks to our TRY forecasts include geopolitical escalation and a deepening trade war between Turkey and the US. A passive approach by the central bank in the event of a renewed fall in the currency could pose another downside risk for our TRY view.”

“We raise our TRY outlook slightly due to the currency stabilisation and diminished standoff with the US. However, the Fed’s monetary tightening and large FX debt redemptions by Turkey’s private sector is likely to weigh on the TRY in 2019. Thus, we remain bearish on the TRY in the long term, expecting the USD/TRY to reach the following levels: 5.70 in 1M (previously 6.00), 6.00 in 3M (previously 6.40), 6.50 in 6M (previously 6.90) and 7.00 in 12M (previously 7.50).”