BIST 100, USD/TRY analysis: What next for Turkish stocks and lira

Turkish stocks and the Turkish lira have diverged this year. On the one hand, the USD/TRY exchange rate has soared to a record high of 28, a 52% jump from where it started the year. The pair has soared by over 1,200% from the lowest point in 2015.

On the other hand, the BIST 100 index, which tracks  the biggest Turkish companies, has been one of the best-performing indices in the market. The index surged to a high of 8,500 TRY this month, 100% above where it started the year. It has jumped by more than 880% from its lowest point during the pandemic.

Many BIST 100 companies have jumped by more than 50% this year as Turkish residents invest in the only asset that seems to be working. Many Turkish companies have also benefited as the weaker local currency makes their goods and services less expensive internationally.

Borusan Mannesman is the best-performing Borsa Istanbull 100 constituent after the shares surged by more than 1,059% this year. It has soared by over 5,980% in the pasy three years. Other top-performers are Mia Tek, Alfa Solar Energi, Oyak Cimento, and Akcansa Cimento, among others. All these firms have surged by over 200%. 

The challenge for the BIST 100 index is that the Central Bank of the Republic of Turkey (CBRT) has become relatively aggressive recently. It has hiked rates to 30% as it battles runaway inflation, one of the highest in the world. In most periods, stocks tend to underperform in a period of high interest rates.

The other risk for the Borsa Istanbul stocks is that the government has implemented currency control measures in a bid to save the crashing Turkish lira. Companies are now encouraged to save most cash in their balance sheets in Turkish lira or risk penalties.

BIST 100 chart by TradingView

Further, technicals suggest that the BIST index rally is peaking. It has formed a small double-top pattern, which is usually a bearish sign. At the same time, the moving average convergence divergence (MACD) has moved below the neutral point. The histogram of this indicator moved below zero earlier this month.

The Relative Strength Index (RSI) has also formed a bearish divergence pattern. Therefore, i suspect that the BIST 100 index will soon have a bearish breakout as investors start taking profits. If this happens, the index will likely retest the support at TRY 7,000. 

I expect that the USD/TRY exchange rate will also continue rising even as the CBRT turns hawkish. Investors believe that Erdogan will not tolerate more rate hikes going forward, especially when they are not solving the Turkish lira crisis. Therefore, in this case, the USD/TRY pair

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