USD/TRY: Lira to reverse back lower once support from higher yields fades – MUFG

The lira has continued to be one of the better performing emerging market currencies over the summer as USD/TRY has fallen back closer towards the lows from June at 8.2860. However, recent lira strength will not be sustained, in the opinion of economists at MUFG Bank.

Risks to inflation remain tilted to the upside

“Further disruption from the ongoing spread of the Delta COVID-19 variant is dampening optimism over the strength of the global recovery. New cases of covid have also risen sharply recently in Turkey which has increased the risk of further disruption to the domestic recovery.”

“Headline inflation has already accelerated sharply to 19.0% in July. It leaves little wiggle room for the CBRT to begin lowering rates despite ongoing calls from President Erdogan.”

“Inflation is not expected to ease until later this year when we expect the CBRT to begin lowering rates. We expect lira strength to reverse once support from higher yields fades.”