The Turkish lira could stage a comeback in 2024 as the Federal Reserve and other Western central bank cuts rates and as the country’s inflation eases. This is according to Piotr Matys, an analyst at InTouch Capital and is supported by the positioning in the options market.
Turkish lira is at a record low
The USD/TRY remains at its highest level on record, making the Turkish lira one of the worst-performing currencies in the world. It has lost almost 500% of its value in the past five years and by 2,690% since 2008. This performance has been because President Erdogan dislikes high-interest rates and the lack of CBRT independence.
However, according to Piotr, there are some signs that the Turkish lira will bounce back later this year. He expects that the CBRT will maintain a hawkish tone and continue hiking interest rates this year. The bank has been the most aggressive recently as it pushed rates from 8.5% in May to 42.5%. Economists believe that the bank will continue hiking rates later this year.
Turkish rate hikes will coincide with a period when the Fed and other central banks are expected to start slashing them. Economists expect the Fed to start cutting rates as soon as in March. The Fed Rate Monitor Tool has a 90% chance that it will cut in June.
Turkey inflation to peak in 2024Piotr also expects that Turkish inflation will start decelerating later this year. The most recent data showed that the headline CPI climbed to 64.8% as the cost of most things rose. A decision by the government to hike wages could lead to more inflation later this year. Still, Piotr sees a situation where Turkey’s inflation drops below the CBRT interest rate. He said:
“It’s worth noting that a peak in Turkish inflation should coincide with major central banks led by the Fed cutting interest rates, which would make the lira potentially attractive for carry trade players despite still-lingering risks.
Meanwhile, the options market is getting less negative about the currency. Data shows that bearish bets on the currency have plunged to their lowest level in over six months, which is another positive sign.
However, historically, going long the Turkish lira has been one of the worst trades on record as the currency has been in a freefall. A currency that was trading at $1 in 2008 has now plunged to $30. This is a major issue now that many companies and individuals have opted for the US dollar as their lira holdings lost value. It is unlikely that these people will move back and embrace the lira.
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