Commerzbank is revising its estimate of the Turkish lira for the worse, after warning in March of a historic low at 10 lira against the dollar, it now estimates it will reach 11 per dollar.
Turkey’s central bank began lowering interest rates in September, sparking an inflationary monetary spiral. The pound has approached 10 against the dollar and option traders are giving a 63% chance of catching 10 against the dollar by the end of 2021. It is noted that the Turkish lira has fallen more than 20% since the beginning of the year.
“A few months ago this level did not look realistic,” said Ulrich Leuchtmann, Commerzbank’s head of monetary strategy. “We want to remind our customers of the magnitude of the risk.”
“Under the inconsistent monetary policy and inflation targeting framework, the exchange rate can be depreciated unexplaised,” Ghose said in a note. “A further cut in interest rates seems likely,” she added.
According to Bloomberg, Leuchtmann stressed that “every day without bad news is positive news” to add that the retreat of the Turkish lira will not continue at a rapid pace. However, this does not solve the problem of unsustainable monetary policy and the upward momentum of inflation.”
“There is a lot of potential for the pound in the short term, but the medium-term direction is clear,” he added.
The same view is shared by Nick Stadtmiller, New York-based director of emerging markets at Medley Global. “It is very difficult for the markets to ‘price’ the political risks when they do not know if or when they will manifest themselves,” Stadtmiller said.
