Barclays Expects Lira to Continue Slowing Down in Value Decline Next Quarter

Foreks - Barclays reported that they expect the Turkish Lira to continue to depreciate at a slower pace than implied by futures contracts in the upcoming quarter. They stated, "This means that the Turkish Lira continues to be an attractive carry destination, particularly against the Euro." Barclays emphasized that they expect the Central Bank of the Republic of Turkey (TCMB) to maintain its policy of real effective exchange rate appreciation in the near term, as it has helped mitigate inflation.

However, Barclays pointed out that the pace of real appreciation must be moderate to limit its spillover to the Turkish current account, stating, "In our view, the real effective exchange rate appreciation has already reached overvalued levels. Therefore, in the long term, we expect this overvaluation gap to start closing if inflation stabilizes at a lower level or if the current account deficit begins to worsen."

Barclays anticipates that TCMB will make its first 2.5-point rate cut in December 2024 and continue to ease monetary policy at a steady pace until reaching a final rate of 27.5%. They also noted, "However, recent upside surprises in inflation suggest that TCMB may adopt a cautious approach and keep policy rates steady until next year."

They indicated that year-end minimum wage discussions remain an important risk for medium-term inflation, arguing that if this risk materializes, it would create upward pressure on interest rates. In their report, Barclays mentioned that they have upgraded their recommendation for Turkey from "underweight" to "market weight," stating, "Valuations do not look attractive, but improvements in stock and flow variables have significantly reduced vulnerabilities, and the high share of local ownership should continue to shield credit from broader macro fluctuations."

Barclays also noted a preference for Turkish financial sector stocks (increasing exposure) over companies (market weight).