TURKEY: Commerzbank Believe USD/TRY Remains Below Fair Value

Commerzbank note that the non-response of the USD/TRY exchange rate to recent liquidity tightening measures in recent months must mean that:

1. Either such factors are secondary and ineffective because the exchange rate is currently stronger than its fundamental fair-value, and is gradually finding its way to such value.
    
2. Other currency-negative factors are popping up around the same time, which is neutralising the liquidity tightening.

• Commerzbank believe that the lira’s fair-value is indeed weaker. Hence, despite significant monetary tightening, the exchange rate continues to drift.
• Additionally, they note that the latest SONAR survey reportedly shows that an increasing fraction of the electorate wants early elections because of dissatisfaction with the economy. Commerzbank say the reality is that the economy would have to get a lot worse if inflation were to be truly controlled, and in this environment, those who had been sceptical about President Erdogan tolerating a further, extended economic downturn may be proved right. This intensifying risk is becoming a big lira negative.