TRY: stronger short-term but set to weaken yet again - Danske Bank

According to analysts from Danske Bank, the political risk continues to affect negatively the economy and the Turkish lira but they point out that growth remained solid. 

Key Quotes: 

“Turkey’s economic growth remained solid in Q1 18: GDP expanded 7.4% y/y versus 7.3% y/y a quarter earlier. Industrial production growth continues to slow down, and Turkey’s central bank’s sharp monetary tightening is set to put the brake on economic expansion in the long term.”

“Geopolitical risks remain high and renewed tensions between Turkey and the US and renewed sell-off pressure on the TRY cannot be ruled out. We do not expect the IMF to get involved. 

“Turkey’s central bank (TCMB) did not hike rates in July 2018, as markets were anticipating a weakening TRY. However, accelerating inflation (15.85% y/y in July) and TRY’s slump suggest that monetary policy has to be tightened, although it may happen implicitly. The Turkish central bank has been tightening requirements for FX swaps locally and providing TRY liquidity at higher levels than the official key rate suggests. An emergency hike should not be excluded, if the USD/TRY jumps again over 7.00.”

“The TRY exodus has been fast on deepened geopolitical confrontation with the US.”

“However, we continue to remain bearish on the TRY in the long term.”