USDTRY One Year On

It’s now been a year since we saw the crash in TRY. This crash led USDTRY to explode from around 5.25232 at the start of August 2018 to highs of 7.11745 in under two weeks.

It has been an important year for Turkey. What began as a diplomatic standoff with the US spiraled into a full-scale backlash against a credit-driven overheating of the economy.

Turkish Economy Recovering

In Q2 2018, Turkish growth fell into negative territory. Growth made it all the way down to -2.4% as of the final quarter of last year.

However, over Q1 this year, growth moved back up into positive territory. It hit 1.3% as a result of credit stimulus ahead of local elections. Following some significant adjustment over the last twelve months, the Turkish economy is now in much better health.

Inflation has also come down sharply. Headline CPI topped 25% in October last year and has now fallen back to 16.7% as of July this year. It is forecast to end the year at 15% or under.

Furthermore, the current account deficit, expressed as a percentage of GDP, has also recovered. From 6.5% in Q2 2018, it sits at 1.7% as of Q1 this year.

CBRT Cuts Rates

Following a series of sharp rate hikes last year to counter the spiraling inflation, the CBRT cut rates in July this year from 24% to 19.75%. This cut was greater than forecast with the CBRT noting that continued improvements in the inflation outlook, along with better domestic demand and supported the move.

Erdogan Supporters Split

In the political landscape, things have also changed. Turkey’s dominant AK party lost power in the country’s biggest cities in local elections held in March.

President Erdogan demanded re-elections, but the AK party was once again wiped out and defeated by an overwhelming majority. As a result, there has been a deeper split among those loyal to Erdogan and those expressing concern over his behavior and motivations.

Indeed, some senior members of the AK party have discussed forming a new political party. The new party aims to attract support from current, disillusioned AK party members.

Consumer Confidence Still Shaky

While the economy is back on a better footing, consumer confidence is still a little shaky. After the index recovered in March and April of this year, it suffered another hit in May.

Furthermore, although retail sales have recovered from the heavy hit they took in October–December last year, they have remained in negative territory all year so far. They started in January at -6.4% and sit at -3.7% as of the last reading.

PMI readings have also improved since Q3 last year. However, they have yet to move back into expansionary territory above the 50 level. Essentially, while leading indicators reflect a mild recovery, they are not yet showing signs of a strong pickup.

Global Downturn

Given the general downturn in global growth due to the ballooning US-China trade war, Turkish trade with the eurozone is suffering. This is ultimately capping the recovery.

However, with the Fed expected to ease further and the ECB also likely to start easing again, there is a greater appetite for higher-yielding EM assets. This should help buffer Turkey through increase capital inflows.

As a result of these offsetting factors, the current trajectory of subdued economic growth is likely to continue in Turkey allowing the CBRT to continue cutting rates.

Technical Perspective

The decline in USDTRY over the year has been framed by the falling wedge pattern which price is currently still trading within. After recent lows around 5.4497, price is now retesting the 5.5852 level with the top the falling wedge pattern sitting just above. If we break above here, focus will be on a test of the 5.70319 level next. Bullish divergence in the RSI indicator coupled with the falling wedge pattern, suggests the risk of a reversal higher.