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Market Analysis

Fundamental Analysis: Lira Bounces ahead of Rate Decision

March 05, 2019
BY Michael Stark

The Turkish lira has recovered somewhat so far this week against most major currencies. Among the drivers of this movement are data, especially lower inflation in Turkey and better export data for February. Norwegian investment in Turkish companies has also played a role.

Having traded at six-week lows at the end of last week, the lira has moved upward slightly to around ₺5.37 to the dollar today. EURTRY and GBPTRY have declined more significantly below ₺6.09 and ₺7.08 respectively.

Data most important but sentiment also in view

Overall the data from Turkey yesterday was very positive considering the circumstances. Yesterday’s release of the yearly consumer price index at 19.67% was lower than the expected 19.90% and nearly a whole percent below the previous figure. YoY PPI meanwhile declined by more than 3% in February.

Many traders were careful not to overlook data on Turkish exports yesterday. The figure rose to ₺13.6 billion for February, beating significantly the figures for most of last year despite the overall higher value of TRY since then. Turkey’s trade deficit is still around $2.5 million, but the average for 2019 so far is the lowest in a decade. These releases might suggest that predictions of a boom in Turkish exports aren’t so far-fetched.

Sentiment on the lira also received a boost from confirmed reports of further Norwegian investment in Turkish companies. Local Turkish as well as international media reported yesterday that Norway’s oil fund has invested a total of $707 million in Turkish shares since the end of last year.

The biggest purchases are shares worth $63.6 million in the refiner TÜPRAŞ and $28.8 million in Ereğli Iron and Steel Mills. That Norway would continue making large investments in Turkey is a major factor in favor of the lira because of the confidence it demonstrates in the Turkish economy’s incipient recovery.

No change likely tomorrow, but high volatility expected

The Central Bank of the Republic of Turkey (CBRT) meets at 11.00 GMT tomorrow to decide and announce March’s rates. Traders’ focus is mainly on the one-week repo rate which is likely to remain at the unusually high level of 24.00%.

This consensus is sound. The lira’s recent spate of fairly minor losses last week is a negative factor for the government going into this month’s elections. This means that the CBRT is unlikely to cut before the end of the month at least.

On the other hand, rates can’t remain at 24% forever. While Mr Erdogan’s opposition remains, the immense cost of borrowing is arguably the most significant barrier to higher economic growth. Traders should not rule out entirely the possibility of a small cut tomorrow.

More gains in store for TRY until tomorrow morning

Fundamentals as of now are quite positive for the lira, suggesting a continuing upward movement until tomorrow morning. The CBRT’s meeting though will drive very high volatility for TRY in most of its pairs. This event has significant potential to alter the fundamental picture entirely.

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