What is the Long-Term Outlook for the Euro Against the Turkish Lira?
The Turkish Lira has continued its decline against major currencies, including the Euro and the US Dollar. Recently, the Euro reached a record high against the Lira, highlighting the ongoing economic challenges facing Turkey.
On Tuesday, the Euro traded at 4.59 against the Turkish Lira, closing the day at a historic peak. This trend continued into Wednesday morning, with the EUR/TRY parity climbing further to 4.60, setting a new record. This depreciation means the Turkish Lira has lost approximately 24.29% of its value against the Euro since the beginning of the year. This performance positions the Turkish Lira as the weakest major currency tracked by Bloomberg against the Euro.
The US Dollar also saw gains against the Turkish Lira, reaching levels around 3.91 on Tuesday, approaching the peak it hit in January. In January, the USD/TRY exchange rate reached a record high of 3.94. Analysts suggest that the Dollar to Lira exchange rate could soon break this record again. Year-to-date, the Turkish Lira has depreciated by about 10% against the US Dollar.
Factors Contributing to the Lira’s Weakness
Analysts attribute the recent depreciation of the Turkish Lira to a combination of domestic and international factors. İbrahim Aksoy, Portfolio Management Strategist at HSBC Turkey, points out that the weakening trend observed since mid-September is not unique to the Turkish Lira but acknowledges its particularly negative performance.
While Turkish citizens have sold $8.5 billion in foreign currency over the past seven weeks, this intervention has failed to halt the Lira’s decline. Despite offering one of the highest nominal interest rates among major emerging market currencies, the Lira has underperformed since mid-September, experiencing the most significant depreciation.
Aksoy explains further, “Foreign investors had initially entered Turkish Lira positions to capitalize on high interest rates. However, news regarding Northern Iraq and, subsequently, relations with the US, prompted these investors to partially close their Lira positions and shift to foreign currencies.” Furthermore, recent actions by the Central Bank of Turkey (CBRT) aimed at reducing volatility in the Lira market were interpreted by market participants as a signal that the CBRT would avoid raising interest rates despite rising inflation. “In recent days, we’ve observed negative revisions in outlook reports on the Turkish Lira from international sources. All these factors have contributed to the depreciation and negative divergence of the Lira,” Aksoy concludes.
Impact of Current Account Deficit and Monetary Policy
İpek Özkardeşkaya, a senior market analyst at London Capital Group, notes that “it has become difficult to find positive news to support the Turkish Lira” recently. According to Özkardeşkaya, external factors contributing to the Lira’s decline include the strengthening of the Dollar and Euro, investors shifting towards developed market equities and bonds, rising energy prices, and ongoing geopolitical tensions.
Domestic factors, she adds, include the higher-than-expected current account deficit data and the CBRT’s unchanged stance, which has contributed to an environment of uncertainty. The CBRT’s data released earlier in the week showed that the current account deficit for September was higher than expected, reaching $4.53 billion.
Bond Yields Reflect Market Pressure
Parallel to the record in the EUR/TRY parity, Turkey’s 10-year bond yields also climbed to a record high of 12.49%. Özkardeşkaya believes this is another indication of the selling pressure on Turkish Lira assets. While central bank intervention might initially calm the market, Özkardeşkaya emphasizes that the fundamental solution lies in adapting monetary policy to the risks facing the Turkish Lira. Otherwise, she warns, the market will find its equilibrium through price adjustments.
Long-Term Economic Outlook and the Euro
Analysts believe that long-term economic data will be crucial for the Turkish Lira’s performance. Aksoy stresses that the perception that the Central Bank can and will act against Lira depreciation when necessary is vital for the Lira’s trajectory. However, Aksoy suggests that interest rate hikes alone may not suffice. “Despite high interest rates, the negative divergence observed in the Lira over the past two months indicates that interest rate hikes alone may not be enough to prevent depreciation.”
“For the Lira to follow a more stable course, attracting long-term financial flows such as foreign direct investment and other long-term capital, rather than short-term and easily reversible portfolio investments, is essential.”
Looking ahead, Özkardeşkaya anticipates continued volatility and potential new lows for the Turkish Lira against the Euro and other major currencies. “In the short term, we may experience turbulence, even see new records. Currently, there is not much news in the market supporting the Lira. The fate of the Lira may continue to be determined by international markets and global risk appetite. In this scenario, a downward correction is also possible.” “However, in the medium to long term, the current account deficit, inflation, and the rise in commodity and oil prices will continue to negatively impact the Turkish Lira,” she concludes, suggesting a continued challenging outlook for the Lira against the Euro in the foreseeable future.