USD/TRY forecast: lira outlook as Turkish inflation slows

September 03, 2024 03:24 AM PDT | By Invezz

USD/TRY forecast: lira outlook as Turkish inflation slows — Image source: Invezz

Turkish economy is not doing well

The USD to TRY pair has been in a strong bull run this year as concerns about the Turkish economy continued.

A report released on Monday showed that the economy grew by 2.5% in the second quarter, a sharp decline from its 5.3% growth rate in the first quarter. This growth was lower than the median estimate of 3.2%.

Another report showed that the manufacturing sector continued contracting in August. The Turkish manufacturing PMI rose slightly from 47.20 in July to 47.80 in August. A PMI reading of less than 50 is a sign that a sector is in a contraction mode.

Meanwhile, Turkey exported fewer items in August. Total exports stood at $22.1 billion in August, down from $22.5 billion in the previous month. This performance is likely because Turkey banned exports to Israel because of the ongoing crisis in the region.

The deteriorating state of the economy partially explains why Turkish stocks have retreated in the past few weeks. The BIST 100 index, which tracks the 100 biggest companies in the country, has moved into a correction, falling by 10% from its highest point this year.

BIST 100 index chart

Turkey inflation retreats

On the positive side, there are signs that inflationary pressures are easing. According to the statistics agency, the headline Consumer Price Index (CPI) retreated from 3.23% in July to 2.47% in August, a faster drop than the expected 2.64%. It dropped from 61.78% in July to 51.97%.

The core CPI, which excludes the volatile food and energy prices, also continued falling last month. It moved from 3.23% in July to 2.47% in August and from 61.78% to 51.97% on a year-on-year basis.

These numbers mean that the country’s inflation, while high in global standards, is moving in the right direction since it has dropped in the last three consecutive months.

Analysts now expect that, barring any major events, inflation will continue falling and end the year at about 35%.

The ongoing trends on inflation are partly because of the high bar set in 2023 and the actions by the central bank.

The bank, popularly known as the CBT or the CBRT, has started moving to orthodox monetary policy by hiking interest rates. It hiked rates from less than 9% in May last year to 50% this year.

High interest rates help to fight inflation by slowing the economy and by incentivising people to save money and receive strong returns. Now, with inflation approaching 50%, there is a likelihood that some local and foreign investors will start moving to Turkish assets like money market funds.

The risk for the Turkish lira is that the central bank may move back to unorthodox policy and start cutting interest rates prematurely. In a note, Muhammet Mercan, ING Bank’s Chief Economist for Turkey said:

“The downtrend will likely continue as the lagged effects of monetary tightening on credit and domestic demand and the continued real appreciation of the lira will keep the underlying inflation trend on a downward path for the remainder of this year.”

US nonfarm payrolls data ahead

The next important catalyst for the USD/TRY exchange rate will be the upcoming US jobs numbers scheduled on Friday.

These will be notable numbers because the Fed has hinted that it is now focusing mostly on the labor market now that inflation has eased.

Analysts expect the report to show that the economy added over 140k jobs in August while the unemployment rate eased to 4.2%.

In addition to the headline numbers, the US dollar will react to the upcoming wage growth and the NFP revision for July. The BLS has been revising the number of jobs additions downwards in the past few months.

In August, the agency downgraded the number of jobs added in the 12 months to March this year by over 818,000.

USD/TRY technical analysis

USD/TRY chart by TradingView

The daily chart shows that the USD to TRY exchange rate has been in a strong bull run for a long time a the Turkish lira crash imploded.

The pair has formed an ascending channel shown in green and is slightly above the lower side. It has also remained above the 50-day and 100-day moving average.

Therefore, the path of the least resistance for the pair is bullish, based on its past performance. The caveat, however, is that a sharp USD/TRY decline cannot be ruled out as some investors start to bet on the lira.

The post USD/TRY forecast: lira outlook as Turkish inflation slows appeared first on Invezz

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