HomeEuropeGoldman Sachs' three-month target for a lira plunge happened in three days

Goldman Sachs’ three-month target for a lira plunge happened in three days

Residents waiting at a bus stop under a large Turkish flag in Istanbul, Turkey, on Sunday, April 30, 2023.

Bloomberg | Bloomberg | Getty Images

The Turkish lira has extended its post-election freefall this week, already surpassing a Goldman Sachs forecast for a significant weakening of the currency over the next few months.

The U.S. investment bank at the weekend projected that the lira still had room to plunge further to deeper lows: to 23 against the greenback in three months, compared to a previous estimate of 19 against the dollar.

“We revise our USD/TRY forecasts higher to 23.00, 25.00 and 28.00 in 3-, 6- and 12-months (versus 19.00, 21.00 and 22.00, previously),” the investment bank’s analysts said in a research reported dated June 3.

Around the time of the report’s release, the embattled currency was trading just above 20 to the dollar. But it has since weakened sharply — past Goldman’s forecast to stand above 23 against the dollar — all within the span of a few days. The lira was last trading at a fresh all-time low of 23.29 against the greenback on Thursday afternoon.

“We think our 12-month forecast could be reached sooner if the FX adjustment continues to be more front-loaded,” the bank said in new research report dated Wednesday.

This was despite spite of the appointment of former economy chief Mehmet Simsek, who is seen as likely to implement market-friendly policies.

In the unveiling of his new cabinet over the weekend, Turkey’s President Recep Tayyip Erdogan named the former deputy prime minister to be his new treasury and economy minister, which led to some optimism that the country will now forge a new economic path. Simsek has since pledged to restore rational economic policies following years of unorthodox decisions and rate-cutting cycles, despite sky-high inflation, which have been closely overseen by Erdogan.

“The currency obviously was overvalued, especially with the inflationary and credit trajectory, but letting the currency go like this will be even more inflationary,” the founder of Ziemba Insights, Rachel Ziemba, told CNBC’s “Capital Connection” Thursday.

The country’s recent annual inflation rate for May stood at 39.59%, according to government statistics. Last October saw Turkey’s inflation rate soar to a lofty level of 85.51%.

Ziemba forecasts that the lira could continue sliding to 25 to 28 levels to the dollar, and that it will be “hard to find a floor.”

A key element of its movement is also dependent on whether Erdogan allows the next central bank governor to “actually do some of the tightening that’s necessary,” Ziemba added. “Rate hikes will be sort of there. If it’s not this month, it’ll be coming soon,” she said.

Meanwhile, Turkish state banks appear not to be intervening in the currency market, the Financial Times reported citing a source familiar with the matter, suggesting there’s a managed devaluation playing out.

But Wells Fargo’s Emerging Markets Economist and FX Strategist Brendan McKenna told CNBC in an e-mail that he still believes that Erdogan will be “unwilling to hand the monetary and economic policy levers to anyone else, including Simsek.”



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