Turkish lira to strengthen against dollar, experts say

By Burhan Sansarlioglu and Bahattin Gonultas

ANKARA

The Turkish lira may strengthen somewhat from its current depressed level but it remains dependent on a calm context, inside and outside of the country, experts on emerging markets have indicated.

The Turkish lira reached a four-week high against the U.S. dollar on Monday with the dollar/lira exchange rate dipping as low as 3.6590.The exchange rate had hovered between 3.80 and 3.67 over the past two weeks after surpassing 3.94. It started trading at 3.6930 as of 9 a.m. (0600GMT) Tuesday morning.

Timothy Ash of BlueBay Asset Management said the Turkish lira seemed cheap compared to other currencies, claiming this would lead, save for unexpected domestic or international shocks, to the strengthening of the lira in the short and long term.

"I think from most matrices, the lira is cheap -- by historical comparisons, and versus peers," Ash told Anadolu Agency in an email.

Noting the global backdrop was currently beneficial for the lira, with the market expecting a rate hike by the U.S. Federal Reserve in March, Ash said it was also buoyed by stronger U.S. and global growth data as well as by the Turkish Central Bank's "dynamic" tightening.

"Risks for the lira could build though [going] into the referendum and the French presidential election in April. So we could see a bit more short-term lira strength over the next few weeks, but then a weakening again in March/early April, but assuming the referendum result is market friendly, [at the year's] end we could see the lira strengthen again," he added.

A referendum on the country's new constitution is expected to take place in April.

Main objective: price stability

Recently the Turkish Central Bank introduced a set of measures, including the suspension of one-week lira repo auctions, in a bid to boost value of the local currency.

On Tuesday, Turkish Central Bank Governor Murat Cetinkaya said price stability was the main objective.

"The Central Bank will continue to use all the instruments at its disposal to achieve the main objective of price stability. In the upcoming period, monetary policy decisions will be conditional on the inflation outlook," Cetinkaya said.

Piotr Matys, an emerging-market currency strategist at Rabobank, said inflation would still remain an issue in the coming months.

"As for inflation, the precipitous fall of the value of the Turkish lira will continue to fuel inflationary pressure in the coming months. Once this negative impact fades and assuming demand-led pressure will remain relatively subdued, inflation should gradually moderate, although it will end this year well above the official mid-term target set at 5 percent," Matys said.

However Carsten Hesse, a London-based economist at Berenberg, said in an e-mail that a strengthening of the lira to 3.60 levels seemed likely due to macroeconomic data coming from the U.S. economy which reduced the probability of the three FED rate hikes in 2017 that economists have been expecting.

"I think it is likely that the recent trend will turn soon and the [U.S. dollar] will strengthen again putting more pressure on [emerging market] currencies and the [Turkish lira]. Additionally the inflation outlook has worsened as indicated by the two-year inflation break-even rate which now suggests 9.6 percent inflation on average over the next two years, far above the central bank prediction and target, which may put pressure on the Turkish lira to weaken," Hesse said.