Goldman Sachs updates USD/TRY outlook. Here are the new targets

Goldman Sachs has revised its outlook on the Turkish lira, noting diminished carry trade attractiveness despite ongoing depreciation, ahead of an anticipated 350 basis point central bank rate cut next week. The firm has consequently raised its USD/TRY forecasts across all horizons. While elevated political uncertainty persists, rising gross reserves and a narrowing current account deficit are seen as positive developments, mitigating the risks of more volatile lira depreciation.

Analysis

Goldman Sachs has adjusted its outlook on the Turkish lira, signaling that the currency's attractiveness for carry trades has diminished. This is attributed to a steady 1.5-2% monthly depreciation rate, which has pushed total returns on short USD/TRY positions down to approximately 1%, near recent lows. This view is compounded by an expectation that Turkey’s central bank (TCMB) will implement a 350 basis point rate cut next week, a more aggressive move than the 250 basis point market consensus. Consequently, Goldman has raised its USD/TRY forecasts to 42, 44, and 48 for the 3-, 6-, and 12-month horizons, respectively, indicating a more bearish stance on the lira's future value. While elevated political uncertainty poses a risk historically tied to domestic outflows and dollarization, there are mitigating factors. The country's gross reserves are rising, approaching $170 billion, and a sharply narrowing current account deficit is viewed as a supportive development that reduces the probability of a more volatile, disorderly depreciation.

Key Decisions for Investors

• Investors engaged in the lira carry trade should re-evaluate their positions, as Goldman Sachs identifies diminishing returns due to steady depreciation and impending central bank rate cuts.
• It may be prudent to adjust currency hedges or forward-looking models to reflect Goldman's revised, more bearish USD/TRY forecasts of 42, 44, and 48 over the next 3, 6, and 12 months.
• Monitor the upcoming TCMB rate decision for a potential cut exceeding the 250 bps market consensus, as this could act as a near-term catalyst for lira weakness, and watch for political developments that could trigger domestic dollarization.
• Despite the negative outlook on the lira's value, the improving current account and rising reserves may temper the pace of depreciation, suggesting a managed decline rather than a disorderly collapse.