The relentless dollar rally continues to slam the Turkish lira, which has been printing fresh all time lows on a daily basis, and today has been no exception, tumbling over 1.8%, and pushing the USDTRY to an all time high above 3.50.
The collapse is driven by numerous factors: the rally in oil, the strength in the U.S. dollar, the surge in global bond yields, ongoing political uncertainty, signs of weakening economic growth from macro indicators are all weighing on the currency as well as Turkish stocks, which were down over 2%, making them underperformers among peers, according to Gulsen Ayaz, director of institutional sales at Istanbul-based Deniz Invest. Historically, Turkey has been sensitive to rising oil prices, with its high current account deficit having recently benefited from the slump in commodity prices which now is reversing.
According to Morgan Stanley there is little to look forward to for Lira bulls: the bank expects the Lira to hit 3.60 per dollar in about 6 months, and 3.70 by the end of 2017.
“This forecast is at the bearish end of the range of forecasts currently published by Bloomberg, though we expect the consensus to shift towards our forecasts soon... “Risk remains that these forecasts are hit earlier than expected.” Indeed, at this rate 3.60 may be hit by the end of the week.
Morgan Stanley also writes that the government's moves to encourage replacement of FX contracts with liras “address the symptoms of the underlying problems affecting the currency, rather than addressing the causes of currency weakness."
If the drop is not halted, the lira may fall as much as 2%, which marks the worst single daily drop for the Lira since the failed coup in July.
However, it is unclear just how Turkey can arrest the drop: last week the Turkish central bank hiked rates for the first time in over two years, defying pressure from Erdogan who has been pressuring it to lower rates, to prop up the currency. However, as the chart above shows, it has yet to have any impact.