Worst of lira weakness is over, ABN Amro says

The Turkish lira has recovered on the back of improved sentiment and the worst of the currency’s weakness is now behind us, Dutch bank ABN Amro said in a report on Friday.

ABN Amro said the lira may trade at 5.7 per dollar at the end of the year and at 5.2 by the end of 2019. The lira was little changed at 5.35 versus the U.S. currency at 2:50 p.m. on Friday.

“Going forward, we think that it is unlikely that there will be another sharp sell-off in the lira as experienced this year,” ABN Amro senior currency strategist Georgette Boele said in a report published on Thursday. “An economic recession and policy uncertainty are largely priced in. Investors will unlikely be upset by any new negative news on these issues.”

Still, ABN Amro expects short-term lira weakness due to incoherenet policies, uncertainty over what action the central bank will take and local elections in March, Boele said.

“We expect the lira to strengthen against the dollar in the long term,” she said, adding that the dollar will come under pressure in 2019 because of lower Treasury yields, slower economic growth and Fed rate hikes already being reflected in prices.

The lira lost almost half of its value against the dollar earlier this year on fears that government stimulus was overheating the economy and after a political crisis with the United States over the imprisonment of Americans. The currency has since recovered somewhat to trade down by about a third in 2018.

The Turkish economy is set to contract by 3 percent next year after growing 4.5 percent this year, Boele said.

“For 2019, we see a risk of premature fiscal stimulus as the government will try to support the struggling economy ahead of the March municipal elections,” she said.

“In the past, the state of the economy has been trivial for the local election outcome. Leading indicators point toward a sharp recession, which may weigh on the support of the ruling AK-party.”