USD/TRY: Turkish lira particularly vulnerable to contagion risks from Ukraine conflict – MUFG

Analysts at MUFG Bank are looking at the idea of a long USD/TRY trade, with an entry-level at 14.240, a target at 15.300 and a stop-loss at 13.700. They point out the Turkish lira is particularly vulnerable to the contagion risk emerging from the Russian invasion of Ukraine. 

Key Quotes:

“We believe that the TRY is one of the most vulnerable EM currencies to negative spill-overs from the Ukraine conflict. The Central European currencies of the CZK, HUF and PLN have already been hit hard and are likely to weaken further. The TRY faces downside risks from heightened security concerns in the region, a potential dampening impact on tourism flows into Turkey and Turkey’s heavy reliance on imported energy.”

“Fears over supply disruptions have already resulted in the price of oil in liras jumping by around a third since the start of February and takes the cumulative price increase over the past year to around 245%. It will place further pressure on Turkey’s trade balance, and at the same time make the inflation situation even worse in Turkey. Headline inflation had already surged to 54.4% in February. It leaves the CBRT’s policy rate deeply in negative territory after adjusting for inflation.”

“The negative external developments have increased the risk of another leg lower for the TRY following last year’s currency crisis.”