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USD/TRY: Is The Recent Sell-Off Unusual?‏

ByDanske Markets
Published 08/29/2013, 05:57 AM
Updated 05/14/2017, 06:45 AM
USD/TRY
0.18%

In the past week, we have seen a significant sell-off in emerging market currencies and yesterday the Turkish lira took a beating, reaching a record low against the US dollar. The Turkish central bank (TCMB) is currently following a policy of FX intervention to curb the depreciation of the lira. From a growth perspective, we believe this is unwise and with Turkish yields and rates inching up, we do not believe the TCMB is able to maintain FX intervention for long. Additionally, with Fed tapering lurking and emerging market turmoil continuing, downside risk to TRY is significant. In this flash comment, we look at the recent lira weakening in a historical perspective and discuss whether history can provide insight into when the sell-off may stop. Lastly, we relate our findings to our fair value models.

Our conclusion is as follows: although the recent sell-off in the Turkish lira has been considerable it is not unusual. The lira is well known for having very volatile swings and sell-offs of far greater magnitude have been seen – approximately one every second year – since the currency was set floating in 2001. We thus argue that it is only the absolute level (a record low) that makes the recent TRY weakening particular. While downside risks to TRY are significant, our fair value models indicate that we are reaching levels for the lira where it no longer can be said to be overvalued.

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