Goldman Sachs Lower Turkish Lira Forecasts, TCMB Stems Losses by Cutting Cheap Money

- Turkish Lira stronger on Tuesday
- Comes after central bank moves to shore up currency
- Goldman Sachs lower forecasts for TRY

Lira exchange rates

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  • GBP/TRY spot rate at time of writing: 9.4856
  • Bank transfer rates (indicative guide): 9.1536
  • FX specialist rates (indicative guide): 8.0800
  • More information on getting market-beating rates here

The Turkish Lira was broadly higher on Tuesday as markets eased back on days of relentless selling pressure, however it remains questionable whether the losses can be reversed without some hefty interest rate hikes at the country's central bank.

The Turkish Lira has fallen sharply to new record lows against the Pound, U.S. Dollar and Euro in recent days; with the pace and scale of the declines evoking memories of the lira currency crisis of the summer of 2018.

The Lira fell to record lows, despite efforts by the Central Bank of the Republic of Turkey (TCMB) to reassure investors that the country’s economy is recovering from the coronavirus pandemic.

The TCMB had had succeeded in defending the Lira earlier this year with huge sales of foreign currency reserves, however the reserves now appear too low to offer any respite to further declines.

Analysts say the only real option left at the TCMB would be to raise interest rates, thereby creating an incentive for foreign investors to invest in Turkish money markets with the view to benefiting from higher levels of return.

"Rising risks of another discontinuous move strengthens case for rate hikes. In early June, against a backdrop of a steady and heavily-managed Lira, we had highlighted the risk of FX volatility. Now, TRY spot has begun to move and, amid the volatile and illiquid moves of the past several days, pushed through our 3m USD/TRY forecast of 7.00 and is approaching our 6m forecast of 7.50," says Zach Pandl, a foreign exchange analyst at Goldman Sachs.

USD TRY exchange rate daily chart

Above: Daily USD/TRY chart

However, interest rate rises would compromise the economy's recovery by pushing up the cost of lending, something Turkish President Recep Erdogan opposes. Erdogan said on Monday he hopes market interest rates would fall further in order to make investments in the country easier.

With Erdogan pushing the TCMB for lower interest rates, but markets and the Lira demanding the opposite, the central bank has instead opted to reduce the amount of cheap funds it makes available to the market, thereby tightening policy by the backdoor and avoiding a potential clash with the president.

The move appears to have stabilised the Lira for now with the Pound-to-Lira exchange rate falling back a percent to 9.4862 at the time of writing. The U.S. Dollar-to-Lira exchange rate is lower at 7.2422, the Euro-to-Lira exchange rate is lower by half a percent at 8.5432.

* Take advantage of the Lira's fall with bank-beating exchange rates from Global Reach Partners.

GBP TRY long term

Above: Long-term GBP/TRY chart

Despite the improvement, Goldman Sachs have told clients that over the short run risks to the Turkish currency remain skewed to the downside, citing: 1) rising foreign currency deposits locally 2) a backdrop that features a deteriorating inflation outlook, 3) limited reserves, 4) an external financing gap, and 5) an unconventional policy mix that is running up against binding constraints.

In response, Goldman Sachs have lowered their Turkish Lira forecasts by raising USD/TRY forecasts to 7.75, 8 and 8.25 in 3, 6 and 12 months (vs. 7, 7.50 and 8 previously).

"Our new forecasts are broadly in line with forward pricing over 3 and 6 months, but over the longer run, our 12-month USD/TRY forecasts dip below the forwards," says Pandl. "This reflects the idea that sharp moves in the Lira, if they extend, would further strengthen the overall case for policymakers to raise rates and move real rates back to positive territory, which could eventually reduce the pace of Lira depreciation."

The Pound-Lira exchange rate forecasts are set at 10.66, 10.64 and 11.88 over a 3, 6 and 12 month period.