Turkish Lira Poised For Long-Term Appreciation Against Russian Rouble

After more than three years of appreciation by the Russian rouble (RUB) against the Turkish lira (TRY), we think the exchange rate will now head in the opposite direction over the long term.

Our expectations for a move in the lira's favour are based more on rouble weakness than lira strength, as we expect Russia's massive economic challenges to become more evident over the next few years as oil prices fall (our Oil & Gas teams forecasts Brent crude to average US$102/bbl in 2015, down from US$108.70/bbl in 2013). Lower oil prices will speed up the narrowing of Russia's current account surplus, making it even harder for the authorities to fill the financing gap caused by substantial (over US$60bn in 2013) net private sector capital outflows.

While Turkey's macroeconomic trajectory is far from risk-free, it lacks many of Russia's economic and political distortions caused by decades of commodity exploitation. From a shorter-term perspective, the lira also offers positive carry over the rouble, which we believe will increase over the next few quarters.

For now we expect political events to keep volatility high, and we may need to see greater clarity on the trajectory of Turkish politics (which is unlikely until after the March 30 local elections) before the lira really starts to outperform. Nevertheless, we believe the rouble's long-term appreciatory trend is over, and the cross rate is likely to head further in the lira's favour over the next few years.

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