Turkish lira selling pressure eases, but weakness set to persist, MUFG says

Turkey’s lira is enjoying a reprieve from the selling pressure that sent it to a record low last month and the relative stability may persist through the second quarter due to an improvement in sentiment towards emerging markets, according to MUFG Bank.

The lira has made an “impressive rebound” - the largest upswing in a year - after hitting its all-time low at 7.269 per dollar, MUFG Bank said, according to foreign exchange analysis website FXStreet. The currency is likely to end the second quarter at 6.9 per dollar, it said.

The lira fell 0.3 percent to 6.76 against the dollar on Thursday.

“The lira has benefitted alongside other hard-hit emerging market currencies from the broadening U.S. dollar sell-off,” the bank said. “Capital flows to emerging markets have improved since the Fed took aggressive policy action to dampen U.S. dollar strength and support the U.S. economy.”

Turkey’s central bank has spent tens of billions of dollars of its foreign currency reserves supporting the lira this year. Any improvement in the outlook for the currency would ease concerns about the reserves, which have dropped to levels that some economists and investors find alarming.

But doubts persist over the sustainability of recent gains and the lira is likely to weaken over the coming year due to the central bank’s interest-rate cutting policy, MUFG Bank said. Rates stand at 8.25 percent compared with inflation of 11.4 percent.

The lira will therefore probably weaken to 7.2 per dollar by the fourth quarter, the bank said, according to FXStreet.