Depreciation pressure on Turkish lira likely to continue

The crisis of Turkish lira has been overcome yet. The lira continued to fall yesterday after the quiet holidays last week. Finance Minister and Presidential son-in-law Berat Albayrak’s statements that there appears to be no major risks for the Turkish economy and the financial system provide market participants little hope that necessary reforms will be tackled in a timely manner, noted Commerzbank in a research report.

Therefore, fears on the market regarding how the turbulence of lira in mid-August would be seen in the upcoming data are rising. The August inflation data is set to be released next week. It might indicate how urgently monetary policy is required to react. There is high probability that during its next regular meeting in September, the Central Bank of Turkey might ignore this need to act thus cementing the continuation of the lira crisis.

Nevertheless, the impacts of the lira depreciation surpass the price data and might also be reflected in the real economy. The Turkish lira has depreciated over 20 percent against the U.S. dollar between the start of 2018 and the end of July. As one of the main factors impacting the current account, the trade balance might provide a first impression of just how vulnerable TRY was at the end of July. This is because of the fact that foreign investors need attractive conditions to finance Turkey’s current account deficit.

“As long as these external financing needs exist and the central bank does not offer attractive real interest rates the TRY crisis will not have been overcome on a sustainable basis so that the depreciation pressure on TRY will continue”, added Commerzbank.