The Turkish lira is not catching a breather. The USD/TRY exchange rate surged to a record high of 31.77, meaning that the lira has lost over half of its value in the past 12 months. This is a continuation of what has happened under President Erdogan. In his presidency, the pair has moved from around 1 to almost 32.

The outlook for the Turkish lira darkened on Monday after the country’s statistics agency published strong inflation numbers.

Turkey’s inflation continued rising at a faster pace than expected. The headline Consumer Price Index (CPI) rose by 4.5% in February, higher than the median estimate of 3.70%.

This inflation translated to a YoY increase of 67.07%, higher than the estimated 65.74% and the previous month’s 64.86%.

Core inflation, which excludes most of the volatile products continued rising, reaching a high of 72.9% in February.

Turkey’s producers are also dealing with inflation as the PPI figure rose from 44.20% to 47.29%. It jumped by 3.74% on a MoM basis.

These numbers mean that the Central Bank of the Republic of Turkey (CBRT) has more work to do since prices are not retreating as was expected. They also mean that inflation will likely be a challenge for more months to come.

Most importantly, the data mean that the CBRT has more room to hike interest rates. It has hiked rates from 8% to 45%. 

The challenge with these rates is that they remain much lower than inflation. As a result, a person who has saved and is receiving full interest is still losing money in real terms. In this case, they are losing about 22% to inflation.

Turkey needs both fiscal and monetary actions to save the lira, which some analysts believe is undervalued. 

From a monetary perspective, the CBRT needs to be forceful in hiking interest rates. I believe that the lira would see some traction if rates move above inflation. 

The government needs to reduce its fiscal deficits and reach deals with foreigners. In July last year, the government inked a $50 billion investment deal with the UAE. More such actions will help to boost the lira demand.

The government also should hope for a busy summer in terms of tourism. However, while the tourism industry boomed in 2023, its impact on the lira was not felt

The challenge for the government and the CBRT is that Turkish residents and businesses have a long memory. Most of them have been burnt by simply holding the lira. In the past 12 months alone, they have lost about half of their value. As such, most of these people will continue favouring foreign currencies vs the TRY.

USD/TRY chart by TradingView

Conducting a technical analysis of the USD/TRY has become quite challenging since it has constantly formed high highs and high lows. 

Turning to the monthly chart, we see that the pair has constantly risen in for over a decade. As a result, the pair’s 50-day EMA remains at around 20 while the 25-EMA is at 24. The Relative Strength Index (RSI) and the Stochastic Oscillator have all moved to the extreme overbought level.

Therefore, the outlook for the USD to lira rate is extremely bullish as it attempts to retest the resistance at 32. The risk is that a major monetary or fiscal move could see it retreat sharply.

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