ING expects the Central Bank of Turkey (CBRT) to keep its policy rate unchanged at 37% at the Monetary Policy Committee meeting, signalling a continuing tight stance while retaining room for manoeuvre. Recent macroprudential tightening, implemented via lower lending growth caps, alongside contained retail foreign exchange demand, has coincided with stable FX conditions and supported the Turkish lira (TRY). The bank also points to a disinflation process that has proved challenging in recent months, alongside the central bank’s efforts to maintain stability in the currency market.
Looking further out, ING flags a widening current account deficit as a growing constraint for Turkey’s policy framework and a risk factor for the lira’s outlook. While FX reserves are described as high and carry conditions have been thinning, the backdrop has so far underpinned positioning in emerging markets. Against this mix, ING forecasts USD/TRY at 53.00 by year-end.
Short-Term Stability Supports Volatility Strategies
We see the Central Bank of Turkey holding its policy rate firm at 37%, which should keep the lira relatively stable in the immediate future. This hawkish stance, combined with net FX reserves recently climbing to a multi-year high of around $55 billion, gives the bank firepower to manage volatility. This environment makes the lira’s high yield attractive for carry trades over the next few weeks.
For the near term, we believe selling short-dated USD/TRY volatility is a viable strategy, possibly through short straddles. The central bank’s commitment to stability and the attractive interest rate differential suggest limited price swings. This allows traders to collect option premiums that are likely to expire worthless in a range-bound market.
Building Caution for the Lira’s Longer-Term Outlook
However, we are becoming more cautious looking further out, as fundamental risks are building beneath the surface. The current account deficit recently widened to $7.2 billion in April, a clear sign of underlying economic pressure that will eventually weigh on the currency. This structural weakness supports the view that USD/TRY could reach 53.00 by year-end from its current level around 42.50.
To prepare for this expected depreciation, we are positioning ourselves with longer-dated instruments. Buying USD/TRY forward contracts for late in the year helps lock in a rate before the anticipated slide. We are also buying long-dated USD/TRY call options to profit from a significant lira decline while capping our potential losses.
The inflation picture reinforces this dual outlook, with the latest data showing inflation remains stubbornly high at 65%, even if it has eased from its peak. Historically, such periods of policy-induced stability in Turkey have often been followed by sharp devaluations once fundamentals reassert themselves. We believe a strategy that earns carry now while hedging for a weaker lira later is the most prudent approach.
