MUFG analysts see growing downside risks for the Turkish Lira (TRY) versus the US Dollar (USD) as domestic politics and an energy-driven terms-of-trade shock strain Turkey’s external position. With limited FX reserve ammunition and rising geopolitical uncertainty, they now judge upside risks to their USD/TRY forecasts, flagging the possibility of faster depreciation or even a larger one-off devaluation.

TRY vulnerability rising on multiple fronts

"The pace of TRY depreciation has accelerated in recent months following the outbreak of military conflict between Iran and the US in late February."

"After the sharp drawdown in March, reserves had stabilised over the past month until the latest adverse political developments in Turkey last week."

"The CBRT has less ammunition to support the TRY through reserves on this occasion."

"If pressure on the TRY continues to build driven by a combination of adverse domestic political developments and the risk of an intensifying Middle East conflict and energy price shock, it could trigger a sharper sell-off as Turkey’s reserves are depleted."

"In light of these developments, we judge that upside risks have increased to our current forecasts for USD/TRY to rise up to 50.500 by year end."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor.)