Turkey: USD/TRY expected to hit new all-time highs - BBH

Analysts from Brown Brother Harriman, explained that Turkey continues to suffer from a mix of political risk and poor economic fundamentals. According to them, neither factor is expected to go away anytime soon, and so Turkish assets are likely to continue underperforming.  

Key Quotes: 

“We expect USD/TRY to test and move above the all-time high near 3.60 from this month.  USD/TRY has tested the top of an upward sloping channel on the weekly charts dating back to 2012.  The top currently comes in around 3.60, and a break above that would target another parallel channel top that comes in near 3.75.”

“Turkish authorities are growing more concerned about the weak lira.  Deputy Prime Minister Simsek said the government would be willing to help companies manage a gap in FX liabilities and assets.  He added that the government may have to limit the amount of foreign currency debt companies can issue.  The central bank also warned that it can intervene directly in the FX markets to support the lira.  This is simply jawboning, as we don't think they have enough reserves to go down this road.  Gross reserves stood at $98.6 bln for the week ended December 2, which is the lowest since May and does not even cover the nation’s short-term external debt.”

“Turkish bonds have underperformed this year.  The yield on 10-year local currency government bonds is +72 bp YTD.  This is ahead of only the Philippines (+94 bp) and Mexico (+98 bp).  With inflation likely to turn higher and the central bank likely to continue hiking, we think Turkish bonds will continue underperforming.”