The US dollar has been up compared to the Turkish lira since it became apparent that Turkey was heading for an election runoff that President Recep Tayyip Erdogan would likely win, and analyst Morgan Stanley said there s much further room to run now that the 69-year-old has triumphed.
The dollar traded at a record high of 20.3586 lira on Tuesday, a new record. This year's value has surged 9% and has climbed 25 percent from its lows of last June.
On Sunday, Turkey won by a margin of 52% to 48% over opposition leader Kemal Kilicdaroglu. The Turkish Statistical Institute, which recorded inflation at 44% in April, argues that increased interest rates lead to higher inflation, a stance that has hamstrung its central bank. The policy implications of his victory are that the country let the currency depreciate at an even faster rate, and let deposit and loan rates go higher, restrict loan supply and tighten regulatory controls over locals currency transactions, says Morgan Stanley. The combination of a slowdown in domestic demand, a lesser energy import bill and a strong tourism season could reduce the country's current account deficit. There s a risk that the dollar could hit 28 lira by the end of the year, without any change in policy direction, the Morgan Stanley team said. This year, the MSCI Turkey ETF TUR has dropped 20 percent. While valuations remain at a large discount to historical levels, the risks to the lira mean that foreign positioning will remain low and a slowdown in domestic demand is likely to be an additional headwind, Morgan Stanley strategists say.