Turkey's lira helped by positive political and macro news

The lira has strengthened sharply this week, with the TRY basket (50:50 USD:EUR) approximately 5% stronger now than its bottom in mid-September. A part of this rally simply reflects the 'risk on' rally surrounding global EM, but TRY also outperformed, for example, ZAR by 4% since mid-September - hence, fundamental factors have played a role too. 

In general, Turkey is affected in the opposite manner by Chinese developments than is Russia, Brazil or South Africa, which are commodity producers. Weaker China and weaker commodity prices help Turkey's current-account (im-) balance, especially if these developments also lower global market interest rates. 

Turkey recorded surprisingly strong industrial output for August, up 7.2%y/y vs. 2.1% consensus expectation. Finally, there were some potentially positive political developments: PKK militants signalled that they might agree on a ceasefire leading up to the 1 November election; and latest polls show an increase in support for the idea of an 'AKP-CHP grand coalition' with 47% of respondents in a survey backing such a government. 

"USD-TRY is likely to trade around 2.85 by year-end. But, the forecast will not materialize just from positive political news-flow; for the lira rally to continue, either the central bank would have to respond to worsening inflation data by raising rates - which is our base-case assumption - or, the timeframe of Fed lift off would have to be significantly deferred, which would extend the general EM rally", argues Commerzbank.