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23 Feb 2016
USD/TRY headed to all time high 3.0750? - BBH
Analysts at Brown Brothers Harriman noted that the lira has performed along with the rest of EM this year.
Key Quotes:
"Compare this to 2015, when TRY underperformed and lost -20% vs. USD. The only worse performers last year were ARS (-35%), BRL (-33%), ZAR (-25%), COP (-25%), and RUB (-20%). So far this year, TRY is down -1% YTD, and is in the middle of the pack. The worst performers are ARS (-17% YTD), MXN (-5.5% YTD), and KRW (-5% YTD). We expect TRY underperformance to return, as our EM FX model shows the lira to have VERY WEAK fundamentals.
For USD/TRY, the 2.90 area has proven to provide good support since early December. The 20-day MA comes in near 2.87. We believe that negative EM sentiment will return to the markets in the coming weeks. When it does, TRY should be one of the underperformers and so we expect an eventual test of the all-time high near 3.0750 from September. The 2016 high was near 3.06.
Turkish equities have outperformed within EM. Last year, MSCI Turkey was down -12.3% and compares to -16.6% for MSCI EM. In 2016, MSCI Turkey is up 2.4% YTD, and compares to -6.8% YTD for MSCI EM. This outperformance will likely ebb a bit, as our EM Equity model has Turkey at a NEUTRAL position.
Turkish bonds have performed poorly this past year. The yield on 10-year local currency government bonds is +271 bp over the last 12 months. This is behind only Brazil (+305 bp). Behind Turkey is Colombia (+236 bp) and Peru (+214 bp). With inflation likely to remain high and the central bank’s credibility falling, we think Turkish bonds will continue underperforming.
Our own sovereign rating model points to significant downgrade risks for Turkey. Its implied rating of BB/Ba2/BB is well below actual ratings of BB+/Baa3/BBB-. Clearly, the investment grade rating given by both Moody’s and Fitch was premature, and we agree with S&P’s more cautious approach."
Key Quotes:
"Compare this to 2015, when TRY underperformed and lost -20% vs. USD. The only worse performers last year were ARS (-35%), BRL (-33%), ZAR (-25%), COP (-25%), and RUB (-20%). So far this year, TRY is down -1% YTD, and is in the middle of the pack. The worst performers are ARS (-17% YTD), MXN (-5.5% YTD), and KRW (-5% YTD). We expect TRY underperformance to return, as our EM FX model shows the lira to have VERY WEAK fundamentals.
For USD/TRY, the 2.90 area has proven to provide good support since early December. The 20-day MA comes in near 2.87. We believe that negative EM sentiment will return to the markets in the coming weeks. When it does, TRY should be one of the underperformers and so we expect an eventual test of the all-time high near 3.0750 from September. The 2016 high was near 3.06.
Turkish equities have outperformed within EM. Last year, MSCI Turkey was down -12.3% and compares to -16.6% for MSCI EM. In 2016, MSCI Turkey is up 2.4% YTD, and compares to -6.8% YTD for MSCI EM. This outperformance will likely ebb a bit, as our EM Equity model has Turkey at a NEUTRAL position.
Turkish bonds have performed poorly this past year. The yield on 10-year local currency government bonds is +271 bp over the last 12 months. This is behind only Brazil (+305 bp). Behind Turkey is Colombia (+236 bp) and Peru (+214 bp). With inflation likely to remain high and the central bank’s credibility falling, we think Turkish bonds will continue underperforming.
Our own sovereign rating model points to significant downgrade risks for Turkey. Its implied rating of BB/Ba2/BB is well below actual ratings of BB+/Baa3/BBB-. Clearly, the investment grade rating given by both Moody’s and Fitch was premature, and we agree with S&P’s more cautious approach."