While many emerging market currencies have seen weakness against the USD this month USD/TRY is trading in a tight sideways channel.
We expect the USD to break out to the upside and mount a major rally on the TRY. Our view of the fundamentals sentiment and key technical levels to look out for below.
The Turkish economy has been hit hard by the Ukraine conflict which is likely to see Turkey’s current account deficit widen and move above 4% of GDP this year.
If we look at history and deficits that moved above this level 4% level have triggered major falls in the Turkish lira.
“Turkey’s dependence on capital inflows to finance the current account and rollover large external debts is worrying at a time when real interest rates in Turkey are deeply negative and FX reserves are very low relative to Turkey’s external financing needs.” (Capital Economics)
Turkey’s current account position got better last year but it has deteriorated sharply. The seasonally-adjusted monthly deficit in February widened to its largest level since 2018 at $4bn.
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The current account has been hit hard by rising commodity prices, particularly energy and we also have seen a big drop in tourism. Since 2010, 16% of international visitors to Turkey have been from Russia or Ukraine and these visitors have now mostly gone and only a small number have been offset by tourists’ from other destinations.
Turkey relies heavily on USD funding and is vulnerable to the rise in US interest rates and the chances of defaults on loans is high.
If the lira were to fall further this would of course make the risk of loan defaults even higher.
In terms of a move down in the Turkish Lira the government lacks the funds to defend the currency and will be reluctant to raise interest rates due to President Erdogan’s influence on the Central Bank
Technical Analysis– Trading Tight Range Breakouts from Low Volatility
In terms of low-risk high reward entries, one of the best ways to enter a trade is a tight range breakout. On the chart below we can see a tight sideways channel and volatility is low.
Our view is all the risks are the USD will rise sharply so a breakout of the range below should see volatility increase to the upside.
If the breakout stalls then the trade could be liquidated but we think the chances of continuation are high.
The stop loss should on entry be below the bottom of the channel. our view is the recent double top on the candle bodies at 16.40 could be hit.