The dollar has been rising versus the Turkish lira since it became apparent that Turkey was heading for an election runoff that President Recep Tayyip Erdogan would be likely to win, and analysts at Morgan Stanley say there’s much further room to run now that the 69-year-old has triumphed.
The dollar
USDTRY,
traded as high as 20.3586 lira on Tuesday, a new record. The greenback has soared 9% this year and has climbed 25% from its lows of last June.
Erdogan on Sunday won by a 52% to 48% margin over opposition leader Kemal Kilicdaroglu. Erdogan’s view is that higher interest rates cause higher inflation, a stance that has hamstrung its central bank, with the Turkish Statistical Institute recording inflation at 44% in April.
The policy implications of his victory is that the country let the currency depreciate at an even faster pace, as well as let deposit and loan rates go higher, restrict loan supply and tighten regulatory controls over locals’ currency transactions, says Morgan Stanley.
The combination of a slowdown in domestic demand, a smaller energy import bill and a strong tourism season should reduce the country’s current account deficit. There’s a risk that the dollar could hit 28 lira by the end of the year, absent a change in policy direction, the Morgan Stanley team says.
The iShares MSCI Turkey ETF
TUR,
has dropped 20% this year. While valuations remain at a large discount to historical levels, the risks to the lira mean that foreign positioning will remain low, and a slowdown in domestic demand is likely to be an additional headwind, the Morgan Stanley strategists say.
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