USD/TRY likely to rise around 3.60 by Q2 2017; Fed to embark on regular tightening cycle, says Commerzbank

The lira has rebounded modestly this week as the USD has eased off somewhat and EM sentiment has managed to stabilise for the time being. In the lira’s case, there could have been two secondary factors which helped.

The decline in foreign tourist arrivals narrowed slightly in October, which raised optimism that the re-start of Russian chartered flights could turn this trend around. We witnessed a related rebound in service sector confidence indicators as well in the latest readings. However, despite the slightly narrower tourism decline of October, chart 2 depicts the medium-term trend, which is far from out of the woods.

Indeed, tourism began to decline earlier around mid-2015 and there is little reason to believe that the decline has ended. President Tayyip Erdogan warned that the government may implement a temporary ban on forex-based rental contracts, especially at large shopping centres, which were creating unnecessarily large demand for dollars every month.

Such a ban would mean using the regulations channel to temporarily support the lira. However, these above factors are not really game-changers though.

"We therefore stick with our forecast of 3.60 for USD/TRY by Q2 2017, which is based on an assumption that the Fed will embark on a regular tightening cycle," Commerzbank commented in its latest research report.