USD/TRY analysis: Is the Turkish lira doomed?

The Turkish lira has been one of the worst-performing currencies in the world. The USD/TRY exchange rate has risen in the past eight straight month and is now sitting at its all-time high of 32.55.

Think about this. The Turkish lira was trading at 1.1425 against the US dollar in 2007, meaning that it has plunged by more than 2,785% in this period. That makes it the second worst-performing currency in the emerging markets after the Argentinian peso that has imploded as inflation jumped.

The Turkish lira’s collapse happened because of the actions of President Recep Erdogan, who has made low interest rates a key economic policy in the country. Unlike in other countries, he has removed the safeguards that protects the central bank’s independence.

In Turkey, the president can easily hire and fire the central bank governor who defies his wish for lower interest rates. He has already replaced several governors in the past few years. In fact, the central bank has had six governors since 2010. 

The implications of this unorthodox monetary policy coupled with the country’s budget deficits and increased dollarisation have made it difficult for the Turkish lira to thrive. Most Turkish businesses and individuals have moved to other currencies, especially the US dollar after seeing their purchasing power get eroded.

USD/TRY chart by TradingView

The Turkish central bank has been battling to save the currency but these efforts are not working. It has imposed strict currency requirements for banks and importers. Most importantly, it has continued hiking interest rates in an effort to lower inflation and boost the currency.

Turkish interest rates have jumped from 8.5% in May last year to 50% today. In theory, a 50% return should be a good thing when it comes to save the Turkish lira by incentivising deposits. For example, US dollar deposits are only yielding less than 6% today.

However, in reality, investors who receive the 50% return are actually making a loss when you factor in inflation. The headline Consumer Price Index (CPI) rose to 67% in March, meaning that these investors are losing a whopping 17%. 

Therefore, it is unclear whether there is anything that the central bank or the government can do to boost the Turkish lira’s confidence. Now, traders will focus on the CBRT, which will conclude its two-day meeting on Thursday. Another rate hike will likely not have any major impact on the Turkish lira.

At the same time, the Federal Reserve has turned incredibly hawkish now that inflation in the US has been stubbornly high. Some analysts believe that the Fed will hike interest rates later this year if inflation continues rising.

Altogether, there is a likelihood that the USD/TRY pair will continue rising in the coming months unless US and Turkish inflation drops. I believe that the Turkish lira will make some gains when interest rates move above the annual inflation rate. Before that, there is a possibility that the pair will continue rising as buyers target the key resistance at 33.50.

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