Turkish lira set to recover, but geopolitics is ‘wild card’ – Capital Economics

The Turkish lira will probably strengthen to 8 per dollar by the end of the year after sliding to an all-time low, according to London-based research and consultancy firm Capital Economics.

Previous selloffs in the lira suggest that most of the weakness in the currency may have already happened, but geopolitical developments are a wild card, Capital Economics said in a report on Wednesday. The lira slid to 8.3244 per dollar this week, extending losses this year to almost 30 percent.

Previous bouts of lira declines have tended to total 10 percent to 15 percent from peak to trough over about two months, with the exception of a currency crisis in 2018, said emerging market economists Jason Tuvey and William Jackson, citing their own research. This time around, the currency has so far weakened by around 12.5 percent since mid-August, they said.

The lira has tended to recover some, but not all its lost ground in previous rebounds, in most cases rallying between 4 percent and 8 percent over the following one to three months, according to Tuvey and Jackson. The largest appreciation came after the 2018 crisis, when it rose by more than 25 percent over the subsequent three months, they said.

A surprise element could be the geopolitical situation. If deteriorating relations between Turkey and the West triggered sanctions, or even the fear of such measures, then the lira could weaken further, Tuvey and Jackson said. U.S. sanctions for Turkey’s detention of an American pastor on terrorism charges helped trigger the sell-off two years ago.

“The experience from the 2018 currency crisis is that, even if the currency looks undervalued, it can deviate substantially from its ‘fair value’ in the near-term. At the height of the crisis, the lira suffered intra-day falls against the U.S. dollar of as much as 12 percent,” they said.

The lira will probably weaken to 9.25 per dollar by the end of next year, they said.