Turkish lira expected to positively diverge from other EM currencies
by Daily Sabah
ISTANBULMar 13, 2017 - 12:00 am GMT+3
by Daily Sabah
Mar 13, 2017 12:00 am
With the "normalization" of domestic and foreign agenda, the Turkish lira is expected to diverge from similar emerging market currencies in a positive direction and enter the process of appreciation and approach the averages.
Given the average of emerging market currencies, the Turkish lira has maintained a horizontal course against the dollar in 2016, while also experiencing a decline by 21 percent against the dollar with negative divergence due to various reasons, including the July 15 coup attempt, international rating agencies' downgrades, and geopolitical developments. In 2017, however, the negative divergence continues despite being limited, while the Turkish lira has depreciated by 5.8 percent against the dollar in a period where emerging market currencies have appreciated by 2.5 percent on average against the dollar.
Analysts predict that the Turkish lira, which has continued its negative divergence for a while, will close the gap if the state of emergency and referendum period end in the country, the parties in Syria reach an agreement and declare a cease-fire, or the uncertainties regarding the international monetary policies diminish.
The fact that the real effective exchange rate (REER) index calculated by the Central Bank of the Republic of Turkey (CBRT) is far below the historical averages has also increased expectation that the Turkish Lira will enter the appreciation process to approach the average, with the normalization of the economy and political agenda, and thus diverged positively.
Ziraat Bank Economist Bora Tamer Yilmaz noted that the REER index, calculated in accordance with the inflation and nominal exchange rate developments, fell to 88.8 percent in February, marking the lowest level in real terms since 2003.
According to the calculations made by Ziraat Bank in consideration of the real exchange rate, future-oriented expectations, inflation predictions and the increase in efficiency, the Turkish Lira must be hovering around at less than 30 percent of its current value. "We are following the statements by international organizations that substantiate the levels we predict. Investors can price the Turkish lira at a lower level than it deserved, taking future inflation into consideration," Yılmaz noted.
Turkey Macro View (TMV) consulting Executive Director İnanç Sözer said the Turkish lira hit the lowest levels in real terms at the beginning of 2017 since October 2002. Yet he drew attention to the fact that the Turkish lira has recovered since the beginning of January, and more importantly that the currency volatility will decrease a significant extent. Moreover, Sözer also said that the global and regional turn of events subjects the Turkish lira to risks that could cause further tumbling.
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