Dollar-lira rate heads higher

James Lord, strategist, Morgan Stanley

Dünya Executive - - REPORT -

Regardless of whether the rally in the Turkish lira finishes this week or next, we continue to hold our view that currency gains from the referendum approval are likely to be temporary. We stick to our end-2017 forecast of 4.0 lira to the dollar. We believe that there is limited tolerance for sustained appreciati­on in the real effective exchange rate, which means that with high inflation, nominal depreciati­on will be required over the medium term. Our base case remains that there will be limited structural reforms to boost productivi­ty growth or competitiv­eness, and thus the currency will remain weak in order to prevent a widening in the current-account deficit. The bear case for the lira will emerge if early elections are called, despite the referendum victory, or if question marks are raised about the Central Bank’s ability or willingnes­s to keep interest rates high. The bull case for the lira will emerge if relations with foreign partners improve notably or domestic political uncertaint­y drops to the extent that allows strong reform momentum to result from the new political framework. Any cabinet reshuffle will need to be watched, too, as a key risk for the currency. (April 19)

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