One month ago, on March 22, when the Turkish lira suddenly cracked, and suffered what was then its biggest one-day drop since last summer's crisis as public attention turned to the sudden plunge in the nation's reserves and the bank's unexpected 150bps equivalent tightening in policy, JPMorgan FX strategists poured gasoline on the fire when - as the lira was sliding - they published a note recommending a 5.90 target on the USDTRY.
As JPM analysts Anezka Christovova and Saad Siddiqui wrote then, recommending a lira short, Turkish authorities would likely "attach less significance to lira stability and reduce FX reserve support" for the currency following March 31 elections, resulting in further lira weakness, adding that the pace at which Turkey’s burning net foreign reserves is “unsustainable” and therefore “FX reserve support will abate post local elections on March 31, which could lead to USDTRY trading substantially higher."
Predictably, it also prompted Erdogan's anger, with Turkey’s banking and capital markets regulators opening separate investigations into JPMorgan Chase the bank's recommendation to short the lira.
Desperate to create a scapegoat for the sudden plunge in the currency, which as it turned out had since last summer been artificially propped up by local banks (while the central bank pretended not to intervene and thus misrepresented the true level of its reserves), Turkey delighted at the opportunity to blame the plunge in the lira, which is only just now restarting, on JPMorgan. As a result, the banking regulator BRSA said the JPMorgan analysts’ note had “misguiding and manipulative” content that resulted in volatility in markets and hurt the reputation of Turkish banks, according to state news agency Anadolu. The Capital Markets Board began its own investigation on similar grounds, according to a statement on its website.
In the month since then, the lira plunge has only accelerated, and whether the result of JPM's short reco or the fact that the central bank was misrepresenting its reserves by roughly 100%, the lira has since plunged well below JPM's 5.90 target, hitting 5.95 against the dollar on Friday; and so the fury at JPMorgan was promptly forgotten.
But now, a new bank has decided to take JPMorgan's spot and provoke Erdogan's ire, with a fresh lira short recommendation, that sees the Turkish lira crashing to its lowest level on record within 12 months.
In a note published late on Friday by Goldman Sachs, the bank's FX strategist Zach Pandl has assured himself immediate detention, or worse, should he ever step foot on Turkish soil, by predicting that the Turkish central bank’s move away from boosting confidence in the lira is likely to send the currency sliding to levels last seen during the mid-2018 crisis, and worse.
According to Goldman, the unexpected removal last week by the central bank of its pledge for additional tightening if needed "opened the door" to both interest-rate cuts and further currency depreciation.
"Rates are still not high enough to restore confidence in the lira," as indicated by continuing "dollarization", or the increasing share of foreign-exchange deposits in the banking system, Goldman economists Murat Unur and Clemens Grafe wrote in separate note April 25 according to Bloomberg. They also wrote that the central bank will "need to take action to stabilize the lira," adding that "savers require higher risk premia to be willing to hold a higher share of their deposits in TRY."
As a result, Goldman projects TRY to fall to 6.25 in three months, 6.5 in six months, and crash to an all time low of 7 within 12 months, marking a 15% slide in coming year. On Sunday night, Lira was trading at 5.9500.
The full Goldman note is below:
TRY: TCMB opens the door to a cut (and more currency depreciation). On Thursday the TCMB kept its policy rate unchanged at 24%, but removed its tightening bias which stated, “if needed, further tightening would be delivered”. By removing this bias, the central bank opened the door to not only a rate cut at its next meeting on June 12 but also further currency depreciation. The sharp hike in policy rates last year was a necessary condition to stabilize the Lira; and while the policy rate is high enough to achieve a balanced current account, a renewed series of cuts will not help with anchoring inflation expectations or stemming the degree of ongoing dollarization in the economy. Our economists have raised their year-end inflation forecasts to +14% yoy by year-end, taking into account the depreciation of the Lira in recent weeks, and we are rolling our forecasts to show even further depreciation (USD/TRY to 6.25, 6.50 and 7.00 in 3, 6 and 12 months).
We expect Turkey will launch a probe into Goldman's tentacular ways within 24 hours.