USD/TRY: Sell-off in Turkish stocks to trigger bullish break - Rabobank

Piotr Matys, EM FX Strategist at Rabobank, suggests that while USD/TRY has been trading sideways so far this year, the sell-off in Turkish stocks may provide sufficient upside traction to trigger a break higher that would set the USD on the course to a new all-time high versus the lira.

Key Quotes

“In line with other risky assets Turkish stocks have been benefiting from the Goldilocks scenario of a synchronised recovery in the global economy led by emerging markets, persistently low inflation and the Fed gradually withdrawing stimulus at the time when other major central banks continue to provide an unprecedented liquidity. Since the end of 2016 the Borsa Istanbul 100 Index produced a very impressive rally of 69.3% to a record high of 121,532 driven by rising demand amongst foreign investors.”

“To recall, the fresh wave of capital inflows was a major factor supporting our view held since the beginning of 2017 when we argued that USD/TRY was likely to lean lower. This scenario came to an abrupt end in September when a diplomatic spat between Turkey and the US triggered a sharp squeeze higher in USD/TRY forcing us to abandon our cautiously optimistic scenario view on the lira against the US dollar.”

“Essentially, capital inflows are an important driving factor for the lira. Over the short-term horizon the risk of outflows has increased as the markets have started pricing in higher probability that the Fed may seriously consider four instead of initially anticipated three hikes this year due to rising inflationary pressures. The prospects of a faster pace of tightening by the Fed have dented the Goldilocks global environment as reflected in sharp falls in stocks.”

“In case of the Borsa Istanbul 100 Index, the price action so far this year resembles head and shoulders – a pattern that occurs when the predominant trend is in the process of being reversed. The neckline at 113k is a crucial pivot to watch given that a break lower would confirm a reversal towards the November low at 101,491.”

“Such a bearish technical scenario for Turkish stocks would be a bullish signal for USD/TRY. If capital outflows accelerate, it could prove sufficient for USD/TRY to gain enough traction to break higher from the year-to-date sideways range. The December 14 high at 3.8970 would be an initial target followed by the all-time high at 3.9826 next.”

“To annul the head and shoulders pattern and to reduce the risk of USD/TRY resuming an upside trend the Borsa Istanbul 100 Index would have to set a new all-time high in the coming weeks.”