USDTRY Prediction: The Lira Stays Resilient On Tight Monetary Policy

Summary:
• The USDTRY pair by the US dollar to recover the losses incurred in May against a lira emboldened by a spike in foreign currency inflows.

USDTRY inched up by 0.17 percent on Friday to 32.24 as it sustained its recent reversal of a losing streak in May. The pair has lost about 0.52 percent in May, and could be on track to close in the red for the first time since August 2023. The recovery effort is largely attributed to foreign inflows into the Turkish economy as investors jostle for Turkish bonds.  Also, the Turkish central bank (CBRT) retained interest rate at 50% this week, aligning with market expectations.

As of this week, the amount of bond-tied debt held by foreign investors has crossed the $8 billion mark, underlining the attractiveness of the country’s prevailing ultra-high interest rates.  The latest Turkish central bank (CBRT) data shows that the value of non-lira denominated government bonds rose to $5.5 billion in the past four weeks, including $1.5 billion in the week ending May 17. At the current interest rate, carry trades yield an average of 3 percent per month, and this is likely to keep foreign inflows coming.

Carry traders have been lining up to take Turkish government bonds, after the government reverted to orthodox monetary policies amidst a stubborn hyperinflation. The fundamentals surrounding the Turkish lira are also looking up, with the country’s main stock index having gained more that 45 percent this year. Nonetheless, the lira is still about 8 percent weaker against the dollar this year. Furthermore, high inflation rate continues to exert downward pressure on the Turkish economy, as the rate rose to 69.8 percent in April, staying far-higher than the targeted 5 percent.

Technical analysis

The USDTRY pair pivots at 32.23, and the downside will likely continue if resistance remains at that level. That momentum favours control by the sellers and will likely get the first support at 32.20. An extension of that control will likely break the support, and potentially send the exchange rate lower to test 32.23. Conversely, a break above 32.23 will likely swing the control in favour of the buyers. The resulting momentum will likely meet resistance at 32.25. A continuation of that momentum will breach the resistance, at which point the downside narrative will be invalid. Furthermore, it will likely result in gains to test 32.28.