Goldman Revises Lira Forecasts Stronger Again, Sees Flatter Path

(Bloomberg) -- Goldman Sachs Group Inc. improved its outlook for the lira for a second month but said the Turkish central bank’s plan to rebuild reserves will probably even out the currency’s gains.

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After a shift in approach outlined by central bank Governor Naci Agbal, “markets are likely to give policy makers, but especially the lira, benefit of the doubt, given its roughly 15% nominal annualized carry, and the broader dollar bearish environment,” Goldman analysts led by Zach Pandl said in a report to clients.

• The U.S. bank now forecasts the lira’s exchange rate against the dollar at 7.50, 7.75 and 8.00 in three, six and 12 months, respectively
  • That compares with 7.75, 8.00 and 9.00 previously
  • The lira is among the world’s best performers against the dollar since early November; it gained for a fourth straight day on Friday, ending the week at 7.6232 against the U.S. currency
• Turkey’s central bank is set to raise its key interest rate by 2 percentage points on Dec. 24, according to Goldman, after a 475 basis-point hike in November; most economists surveyed by Bloomberg predict a smaller increase in the benchmark to 16.5% from 15%

Turkey’s central bank chief has promised to go all in to curb inflation and build up national reserves, continuing a shift to the monetary policy mainstream following a year of rapid rate cuts by his predecessor that resulted in rapid credit growth and a weak currency. A key element of next year’s policy mix will be to amass foreign reserves without destabilizing the lira, Agbal said last Wednesday.

Read more: Lira Traders, Burnt Eight Times, Hope 2021 Will Be Different

The effort will likely result in “a stable currency path” instead of “outright strength against the dollar, given still high inflation and political risks,” Goldman’s analysts said, warning that any missteps could trigger a market backlash.

“After a long history of unsustainable pro-growth policies, if these credible words are not matched by credible actions, or if the political and central bank leadership appear at odds again, investors should once again quickly revert to a more cautious stance on the currency,” they said in the report.

©2020 Bloomberg L.P.