USD/TRY likely to jump to 7.00 as soon as inflation starts to disappoint again in Q4, says Commerzbank

The USD/TRY currency pair is expected to jump to 7.00 as soon as inflation data begin to disappoint again in the fourth quarter of this year, according to the latest research report from Commerzbank.

The lira may appear to have rallied since this Monday after the Governor of the Central Bank of Turkey (CBT) was fired last weekend by a presidential decree. But this is a misleading picture where a broader EM FX rally is masking the underlying tendency.

In the majority of circumstances, this does not have to be spelled out – but sometimes it is best to as bigger interpretations are involved. The USD-TRY exchange rate had a close of 5.63 last Friday; it spiked up to 5.82 on Monday 8 July as the market digested the news of President Tayyip Erdogan removing CBT Governor Murat Cetinkaya via presidential decree.

Later during the week, USD/TRY settled down around the 5.70 mark: this might give rise to the impression that the market has processed all available information on the future of Turkish monetary policy and has decided to take a favourable view of the lira outlook. But, such an interpretation would be quite misleading.

"We should view lira movements within the context of broader risk sentiment, which improved markedly this week because of remarks made by Fed chair Powell which increased bets on a July rate cut," the report added.

In fact, the lira lost ground against typical EM peers such as the South African rand and the Russian ruble. The lira gapped weaker after the announcement, and after a mild rebound during part of the week, has begun to move lower again, not higher.

"The lira movements nowhere suggest that the market is not bothered about Turkish CB independence any longer. The FX market is not actually contradicting our downbeat prognosis. Rather, continued dovish developments, globally, are masking the underlying tendency," Commerzbank further commented.