Turkey's Lira Set to Sink 40 Percent by 3Q, TD Securities Says

(Bloomberg) -- Want the lowdown on European markets? In your inbox before the open, every day. Sign up here.

TD Securities is defying market consensus to predict another crisis in Turkey's lira.

The Toronto-based investment house has reiterated its call for a whopping 40 percent depreciation to an all-time low of 8.90 per U.S. dollar, according to a report published Friday. This is in contrast to the increasingly sanguine view among traders, who see the currency drifting less than 8 percent weaker by the third quarter.

Cristian Maggio, the head of emerging-market strategy at TD, who initially penciled in a sharp sell-off for the first quarter, says “circumstances have convinced” him this will still happen, though not before the second quarter. He maintains the central bank will have to raise rates by 400 basis points between June and July, in “stark contrast” to a market that expects cuts of some 650 basis points this year.

“The typical pattern is for the lira to go from one crisis to the next one, with stints of relative tranquility in between,” Maggio said. “We think we currently are in one of those stints.”

Lira will come under pressure from a deepening economic contraction, upside risks to stubbornly high inflation, a wide balance-of-payments gap, a “bleak” outlook for the nation's banks which face a mounting pile of bad loans, and a “de facto dollarization” of the economy.

The tumult over the summer whipped a third off the lira's value and left borrowers who binged on foreign-currency debt over the years struggling to repay their loans. The central bank responded by raising rates by 625 basis points in September, ushering in a period of calm in the currency. The lira has mostly traded in a narrow band between 5.15 and 5.35 per dollar all year.

To contact the reporter on this story: Constantine Courcoulas in Istanbul at ccourcoulas1@bloomberg.net

To contact the editors responsible for this story: Onur Ant at oant@bloomberg.net, ;Dana El Baltaji at delbaltaji@bloomberg.net, Srinivasan Sivabalan, Robert Brand