The imbalance between the demand and supply of FX is likely to persist in 2024. However, policymakers’ ‘containment strategy’ should continue to work and limit TRY depreciation in the coming months via three main channels:
1) Supportive FX carry: Carry dynamics have turned in favour of the TRY on the back of the CBRT’s sizeable rate hikes since mid-2023. FX implied yields remain relatively volatile, partly because of FX regulation. But the carry restoration via traditional monetary policy tightening offers a more supportive environment for FX carry trades, in our view. This is all the more likely given that a sustained conventional policy approach is unlikely to offer scope for a policy reversal in 2024.
2) Less negative real rates limit dollarisation: With the central bank’s hawkish pivot, the interest rates paid on TRY deposits have risen strongly. In real terms, the return on these deposits is still negative, but the dynamic has clearly turned more positive for the currency. FX-protected deposits have started to decrease without triggering significant demand for foreign currencies. The attractiveness of deposits in TRY could improve further in 2024 with the likely disinflation in H2. The trend of real rates will be pivotal for the TRY, particularly given policymakers aim to gradually phase out the FX-protected deposit scheme.
3) Supportive macro pulse: Tighter monetary conditions have started to affect the economy via the credit channel. The credit cycle has often been associated with the inflation and current account cycles. With credit growth slowing, domestic demand is likely to be weaker and the current account deficit smaller. Such a sequence could make the TRY less vulnerable.
Therefore, we maintain our view that USD-TRY is likely to rise slowly and moderately to 33.0 by year-end.
Residents are TRYing
The path of the TRY in 2024 is likely to be largely determined by residents’ behaviour and the allocation of their savings between TRY instruments and foreign-currency deposits. Of course, currency allocation is largely a function of interest rate dynamics. But there are other factors at play. On that front, encouraging signs have emerged since the central bank’s pivot. We note two key developments that could lead to higher allocation to TRY:
1) Interest rate paid on TRY deposits becomes more attractive The central bank’s rate hikes have significantly affected the interest rates paid on TRY deposits. They have risen to about 45% from sub-30% before the May elections. Admittedly, they remain negative in real terms, but the dynamic has profoundly changed. Real rates have become significantly less negative. Our conviction is that the forward-looking real interest rate could play a bigger role in increasing the attractiveness of TRY deposits in the upcoming period.
The CBRT’s survey of expectations suggests that respondents think inflation could fall to about 40% by year-end, and about 25% in 24 months. Assuming that deposit rates stay broadly stable, the TRY’s appeal would mechanically increase for locals, in our view. In other words, a new form of ‘lira-isation’ is possible.
Excerpt from the similarly-titled HSBC research report
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