BofA remains confident in the lira's stability despite political risks

Analysts Mikhail Liluashvili and Hande Kucuk of Bank of America (BofA) Global Research recommend selling a two-month USD/TRY forward contract in light of the ongoing political uncertainty 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 was 45.9 at the time of the recommendation. According to the analysts, the monthly carry yield is approximately 3.3%.

“Increasing domestic political uncertainty has led to a reassessment of risks, thereby creating a more attractive entry point,” the analysis states.

BofA Bets on Controlled Lira Depreciation

According to the bank’s assessment, the Turkish central bank continues to pursue the goal of supporting the lira’s real appreciation against the U.S. dollar and keeping real interest rates in positive territory.

This leads to the expectation that the Turkish lira will depreciate more slowly than current forward rates imply. In fact, authorities have so far managed to keep the monthly depreciation below the carry yield.

The key risks to this strategy include a significant rise in oil prices, general strength in the U.S. dollar, increased dollarization of the Turkish economy, geopolitical tensions, and potential capital outflows.

Foreign exchange reserves provide support

According to BofA, Turkey’s liquid foreign exchange reserves stood at around $37 billion as of May 15. Additionally, gold-foreign exchange swaps or direct gold sales by the central bank could further bolster reserves.

According to analysts, the available reserves exceed the total forward foreign exchange contracts, which amount to approximately $30 billion.

Furthermore, foreign investors hold Turkish government bonds denominated in lira worth approximately $14 billion. While these positions could come under pressure during periods of stress, a complete liquidation is considered unlikely.

Foreign equity investments of around $44 billion also appear relatively stable at present, according to BofA.

The bank expects additional support from rising tourism revenues during the summer months, which should improve the current account in the short term.

Dollarization remains a risk

Dollarization within the Turkish economy remains a significant risk for the lira. However, analysts assume that the authorities can counteract this if necessary with interest rate hikes, macroprudential measures, and a continuation of the strategy to achieve a real appreciation of the lira.

The bank also views potential capital outflows from domestic investors as a risk. However, the existing economic policy framework provides sufficient tools to cushion such pressures.

Should tensions in the Middle East continue to escalate and energy prices rise significantly, the Turkish central bank could be forced to allow a faster depreciation of the lira. Even in this scenario, however, Bank of America expects the depreciation to remain below the current carry level over the next two months.

JPMorgan Realizes Gains After Strong Lira Rally

Separately, JPMorgan announced on May 29 that it had fully realized the profits from its long-term overweight position in the Turkish lira.

The strategy had been a core position in the bank’s emerging market bond portfolio since September 2023, with a brief interruption during the Turkish local elections in March 2024.

According to the strategists led by Anezka Christovova, the Turkish lira has delivered a total return of around 55% against the U.S. dollar since September 2023.

JPMorgan had already reduced the size of the position at the end of April and is now pursuing a shorter-term, tactical approach.

The bank cites falling expected yields, rising current account financing requirements, potential strains from higher energy prices, and an increased risk of early elections as reasons for this.

Nevertheless, the strategists expect Turkish authorities to continue prioritizing 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. On a U.S. dollar basis, this corresponds to a return of about 95%.

At the same time, financing costs for consumers remain high. Turkish credit card debtors currently pay monthly interest rates ranging from 3.11% to 4.55%. Between March 2024 and July 2025, the range even fluctuated between 3.11% and 5.30% per month at times.