USD/TRY analysis: Is the Turkish lira plunge over?

The Turkish lira is no longer in a freefall. The USD/TRY exchange rate was trading at 32.30 on Wednesday, where it has been stuck since March. It has risen by over 10% this year and by over 60% in the past 12 months. So, is this the end of the Turkish lira plunge?

Turkey’s fundamentals are not strong

The Turkish economy is not doing well as inflation and budget deficits remain at an elevated level. Data released on Wednesday revealed that the trade deficit came in at TRY 177 billion, equivalent to $5.5 billion.

That figure was an improvement from the TRY 209 billion it made in March. Analysts expect that the country will continue running deficits in the coming months.

Meanwhile, inflation has been a thorn in the flesh for the economy. Data released this month showed that Turkey’s inflation continued soaring in April as energy prices jumped. The headline Consumer Price Index (CPI) rose from 68.50% in March to 68.80% in April. It bottomed at 38.2% in June last year.

The general view among analysts is that inflation will start to moderate in the second half of the year. In a recent statement, the Central Bank of the Republic of Turkey (CBRT) revised its inflation expectation upwards. 

It now expects that inflation will end the year at 38% followed by 14% and 9% in 2025 and 2026. It also believes that the country’s inflation will peak at between 75% and 76% in May and then start falling afterward. In a note, analysts at ING said that they expect a rate cut to happen later this year:

The challenge for the Turkish lira is that the spread between interest rates and inflation is still wide. Inflation is expected to rise to 76% in May while the 2-year yield of Turkish government bonds stand at 43.34%. The 10-year yield stands at 27.64%, meaning that the real yield, including inflation, is in the negative zone.

Additionally, there is the risk that the Federal Reserve will maintain a hawkish stance now that inflation is still high. Data released on Wednesday showed that the headline Consumer Price Index (CPI) slowed to 3.4% while the core CPI fell to 3.6%. This means that the Fed may hold rates higher for longer.

The Turkish lira will, therefore, start recovering when Turkish inflation falls and when the Fed points to rate cuts. However, in the long term, my view of the currency is still bearish because of Erdogan’s policies and the lack of CBRT’s independence.

USD/TRY technical analysis

USD/TRY chart by TradingView

The USD to TRY exchange rate has been in a tight range in the past few months. It has remained at 32.30, which is between the key support and resistance levels at 31.75 and 32.81, respectively.

The pair sits slightly above the 50-day Exponential Moving Average (EMA) while the Average True Range (ATR) has dropped to its lowest swing since March 14th. ATR is one of the most popular volatility indicators.

Therefore, the pair will likely remain in this range in the near term. A break above the resistance at 32.81 will point to more upside. On the other hand, a move below the support at 31.75 will lead to more downside.