BofA bets on lira stability despite political risks

Analysts Mikhail Liluashvili and Hande Kucuk from Bank of America (BofA) Global Research recommend selling a two-month USD/TRY forward contract in view of the ongoing political uncertainties in Turkey. In an analysis published on May 26, they advise shorting the US dollar against the Turkish lira (USD/TRY) on a forward basis at 48.8. The spot rate at the time of the recommendation was 45.9. According to the analysts, the monthly carry yield is around 3.3%. "The increasing domestic political uncertainty has led to a reassessment of the risks and thus created a more attractive entry point," the analysis states. BofA relies on controlled lira devaluation According to the bank, the Turkish central bank continues to pursue the goal of supporting the real appreciation of the lira against the US dollar and keeping real interest rates in positive territory. This leads to the expectation that the Turkish lira will depreciate more slowly than the current forward rates imply. In fact, the authorities have so far succeeded in keeping the monthly depreciation below the carry yield. The main risks to this strategy include significantly rising oil prices, a general strengthening of the US dollar, increased dollarization of the Turkish economy, geopolitical tensions and possible capital outflows. Foreign exchange reserves provide support According to BofA, Turkey's liquid foreign exchange reserves amounted to around 37 billion US dollars on May 15. In addition, gold currency swaps or direct gold sales by the central bank could further strengthen the reserves. According to the analysts, the available reserves exceed the total forward exchange transactions, which amount to around 30 billion US dollars. In addition, foreign investors hold Turkish government bonds in lira worth around 14 billion US dollars. Although these positions could come under pressure in times of stress, a complete liquidation is considered unlikely. According to BofA, foreign equity investments of around USD 44 billion also appear relatively stable at present. The bank expects additional support from rising tourism revenues during the summer months, which should improve the current account balance in the short term. Dollarization remains a risk Dollarization within the Turkish economy remains a major risk for the lira. However, analysts assume that the authorities will be able to counteract this with interest rate hikes, macroprudential measures and a continuation of the strategy of real appreciation of the lira if necessary. The bank also believes that potential capital outflows from domestic investors pose a risk. However, the existing economic policy framework offers sufficient instruments to cushion such burdens. Should tensions in the Middle East increase further and energy prices rise significantly, the Turkish central bank could be forced to allow the lira to depreciate more quickly. Even in this scenario, however, Bank of America expects the devaluation to remain below the current carry level within the next two months. JPMorgan realizes gains after sharp lira rise Irrespective of this, JPMorgan announced on 29 May that it had fully realized the gains from its long-term overweighting of the Turkish lira. The strategy had been a core position in the bank's emerging markets bond portfolio since September 2023, with a brief interruption during the Turkish local elections in March 2024. According to Anezka Christovova's strategists, the Turkish lira has achieved a total return of around 55% in US dollar terms since September 2023. JPMorgan had already reduced the size of the position at the end of April and is now pursuing a more short-term, tactical approach. The bank cites falling expected yields, rising current account financing requirements, possible burdens from higher energy prices and an increased risk of early elections as reasons for this. Nevertheless, the strategists assume that the Turkish authorities will continue to focus on low exchange rate volatility. High returns for investors - high costs for borrowers Some market observers point out that investors in Turkish lira money market funds achieved returns of around 220% between September 2023 and May 2026. In US dollar terms, this corresponds to a return of around 95%. At the same time, financing costs for consumers remain high. Turkish credit card borrowers currently pay monthly interest rates of between 3.11% and 4.55%. Between March 2024 and July 2025, the range was even between 3.11% and 5.30% per month at times. The post BofA backs lira stability despite political risks appeared first on ostwirtschaft.de.