The Turkish lira is suffering a difficult run, with the dollar and the euro rallying sharply against the currency thanks to high domestic inflation and political uncertainty.
On Friday, the lira
saw more pain, nose-diving following Turkey’s October consumer price inflation report, which showed priced jumped 2.1% on the month and 11.9% on the year. One dollar fetched as much as 3.8868 lira, not far off the all-time high set in January, according to FactSet. The pair last traded at 3.8854, a 2.3% jump from Thursday.
Against the euro, the lira
also weakened on Friday, with one euro buying 4.5087, up 1.9% from Thursday, and hitting a new high.
And there’s no reason to think the dollar won’t race to further highs against the Turkish currency, according to Nomura.
“We recommended short lira versus the euro and the dollar basket on Oct. 6 at 3.9025, with a multi-month target of 4.50, risking 3.75,” wrote Nomura senior emerging markets strategist Henrik Gullberg in a note. A move to 4.50 lira would mark a roughly 15.6% rise for the dollar from its recent level.
Earlier this week the Central Bank of the Republic of Turkey warned of an increase in inflation in October and November due to higher commodity prices and exchange rate fluctuations. Yet, the dollar-lira rally accelerated after the October inflation report hit.
The central bank’s rhetoric and Friday’s report “have reinforced our bearish view on the lira,” said Gullberg.
“At the same time there are no real signs that the acceleration in price pressures at the consumer level will lead to a change in policy stance,” he added, as the central bank is expecting inflationary pressure to begin subsiding come December. Moreover, history shows the central bank tends to take action only in the wake of lira selloffs, he said, pointing to the chart below:
And there are still dark clouds on the horizon. Turkey’s 12-month rolling trade deficit has swollen to a two-year high in September at $67.7 billion, and preliminary October data from the Customs Ministry suggest it could rise to $71 billion, wrote Gullberg.
“Political uncertainty persists,” Gullberg said. Turkey’s diplomatic relations with Germany and the U.S. have been rocky of late, with reports saying that the U.S. State Department is looking to fine Turkish banks for violating sanctions against Iran and that Germany is working to reduce Turkey’s international development funding out of European Union pockets.